45 DTE: The Sweet Spot for Options?


The advent of weekly options was a game-changer for option sellers. 

The first weekly options were introduced by the Chicago Board Options Exchange (CBOE) in 2005 on the S&P 500 Index (SPX)

Per Schaeffer’s Investment Research:

“Weekly options were proposed [as] an innovative way for traders to apply short-term trading tactics and strategies in a more cost-effective way. Weekly options were created to promote efficiency in an unpredictable stock market while making the most out of news-driven and short-term market moves.”

Weekly options became available on individual stocks and ETFs around 2010. Since their introduction, weekly options have exploded in popularity, especially for actively traded stocks, making up an increasing portion of options flow over the past decade and a half.

A big part of the allure of selling short-term options is that you don’t have your money tied up for long periods of time. That’s because selling options can be capital intensive. For example, selling a single cash-secured put with a 100 strike price will require $10,000 in capital. (This is one of the reasons we typically use spread strategies when trading stocks with triple-digit share prices, but more on that later.)

Traders tend to like shorter-dated options because they offer them the opportunity to move in and out of trades quickly, redeploying their capital toward new opportunities that yield additional premium. 

However, there’s a catch. Trading very short-term options requires a good deal of cooperation from the market. Because if the overall market or an individual stock moves against you, you have less time and flexibility to manage that position. 

That is why even though we use short-term option selling strategies at Traders Reserve, we rarely trade options that are only one week out (although the opportunity does present itself occasionally). In fact, our typical trades are set at 14 to 45 days out.

Recent research from tastylive speaks to some of the advantages of selling options that are further out, specifically noting the benefits of selling options with 45 days to expiration (DTE).

They include:

  1. More credit
  2. Accelerating time decay
  3. Time to be right
  4. More predictable results

“For 45-day options, there is a level of predictability and lower risk during the initial period after trade initiation. This supports a strategy of early management, around the 21-day mark, to lock in gains and reduce exposure,” writes Jacob Perlman, mathematician and quantitative researcher at tasty

He also notes that “45-day options suit traders who prefer a methodical approach to trading, providing ample time to analyze and act according to market changes with a somewhat moderate risk.”

And I’d say that describes us perfectly. Some people may balk at the use of 45-day options in a short-term trading strategy, but just because you sell an option that is 45 days out does not mean you need to remain in it until expiration. 

A recent Income Masters trade highlights this point perfectly. 

During the June 4 Live Trading Session, we entered a Costco (COST) trade with a July monthly expiration, which was exactly 45 days out.

Given that COST stock trades at over $800 per share, we used a bull put spread strategy. 

A bull put spread, also known as a put credit spread, involves selling a put option and purchasing a put option at a lower strike price with the same expiration date to generate a net credit. The cost of the long put reduces the credit received, but it also significantly reduces the capital required for the trade.

For our Costco trade, we sold the COST 19 Jul 785 Put. Had this been a cash-secured put trade, we would have needed $78,500 in our account to secure just one contract. But we simultaneously purchased the COST 19 Jul 780 Put. This required just $500 per spread — a 99% reduction — and we generated $89 in credit. We sold five spreads in the live account, bringing our total capital commitment to $2,500 and our total cash to $445.

We noted at the time that we planned to be out of this trade well ahead of the July 19 expiration date and set a target exit price of $35, or at roughly 60% of the max profit. We placed a good ‘til canceled (GTC) order to ensure we would be out of the trade if the priced dipped to this level.

Well, we didn’t have to wait long. After just one week in the trade, our Costco spread hit its target exit price, allowing us to exit the position with $54 per spread in profit, or $270 total for five contracts, and a 10.8% return.

This trade illustrates that there is nothing wrong with giving yourself a longer time to expiration. You can still target short-term profits by setting your target exit prices at 50% to 60% of the max profit, or even more if you have a strong market at your back. In other words, choosing appropriate DTEs is another way to put the odds in your favor when selling options. 

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