Covered call: How do you pick best expiration month?

Discussion in 'Options' started by a529612, Apr 26, 2006.

  1. Should you always sell 2-3 months out to get more time value premium or sell the nearest month expiration and keep renewing it every month if it expires worthless?
  2. imho you should sell near month. you want premium decay to work in your favor and decay is fastest in the last month.
  3. But for 2-3 months out, you can sell higher strike for the same or higher premium due to the extra time value. So you get more upside for the underlying...
  4. MTE


    It's a risk/reward trade off. By selling 2-3 months out you give more time for the stock to move against you and you get compensated for that.

    However, in my opinion and as vhehn has pointed out, you want time decay and you just don't get it with a 3 month option. So you end up holding risk for 1-2 months without proper compensation as time decay only picks up in the last month.
  5. OTR


    It all depends on your goals. Like vhehn and MTE, I like to write near month. I write for income and like the quick depreciation I get in the near month. I look to make 5% called/uncalled. If I can't get that in the near term, I often write further out and buy back the calls cheaper once I make my 5%.

    There's a good book which I review on my website:

    Best of Luck!


    Option trading information and tools the pros wish they had! A former Chicago Mercantile Exchange employee reviews stock option trading software, books, and web sites and online income opportunity.
  6. Sure you can sell further out and get more premium, but more time for things to go wrong as well.

    What is the percentage of return you are looking for utilizing this strategy?

    Many times you can sell one month out more times and make a higher percentage of return in the long run. If you are with a cost effective broker, a month at a time is better. Also selling more often (a month out at a time) rather than netting larger premiums further out allows you more opportunity to take advantage of any high volatility situations that may arise.

    Big premiums look good, but can cost you in the long run. Sometimes making two bucks is better doing it one dollar at a time rather than all at once.

    Good Luck,
    as always, just my .02
  7. Your slippage will be smaller in the nearby months. If you're focused on capturing premium and not capital gains, you should be selling the at-the-money strike too. Do what you feel comfortable doing.
  8. jj90


    How do you feel about naked puts?
  9. You forget to mention in your review, as in the posting here, that CC's are equivalent to selling naked puts.
    So the question of the OP comes down to: what expiration month should I choose for my puts when I sell them? Sell a 3 month put or sell a 1 month one 3 times?

    Every book on CC's,indeed every review of such a book, should start with explaining to the reader that a CC is exactly equivalent to selling naked puts. Anyone ignoring this and hiding this fact from the reader either doesn't understand options or, worse, doesn't want his reader to understand that. Both these situations should be illegal for a advisory writer.

  10. MajorUrsa

    "CC's are equivalent to selling naked puts".
    Could you please explain this statement? I'm just new to options stuff. CC - when executed you have no stocks, naked put - when executed, you have stocks. Am I correct? So are they equivalent?
    #10     Apr 30, 2006