← IntermediateLesson 3 · 3:27
Which expiry should you choose?
Summary
You can pick an expiry knowing that more time costs more dollars but less per day, melts more slowly and gives your idea room to be right late. You can also see why the shortest expiry takes the biggest daily bite, and why more time still puts more dollars at risk.
Key terms
- expiry
- The last day an option exists; after it, the option is gone.
- cost per day
- An option's price divided by its days left, showing what each day of time costs you.
- time decay
- Time value draining out of an option as the days pass, even when the stock doesn't move.
- theta
- How much an option loses in one day with nothing else changing.
Check yourself
Answer each question to see why the right answer is right.
1. The $100 XYZ call costs $166 with 7 days left and $600 with 90 days left. Per day of time, which is cheaper?
2. You buy the 30 day and the 90 day $100 calls and hold both for 30 days, with XYZ stuck at $100. What happens?
3. Today's theta for the 7, 30 and 90 day calls is about $12, $6 and $3. What does that tell you?
4. In the example path, XYZ dips to $97 by day 30, then climbs to $106 by day 45. What happened to the 30 day call?
5. Why not always buy the longest expiry you can?
Finished the video and the quiz? .