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When selling options, e.g. a straddle I read often the optimal time for selling options is 30-40 days until expiration.

For me intuitively the optimal time would be around one week until expiration because the option will loose most of it's time value in the last week (theta is highest).

So for example when we look at the AAPL options and want to sell a ATM straddle on 8/15/2015:

  • Selling the Aug. 21 116 Straddle we would collect 1.56+1.57=3.13 premium.
  • Selling the Sep. 11 116 Straddle we would collect 3.50+3.39=6.89 premium.

So basically I could collect about 1/2 of the premium in the last week, and then do another trade next week and collecting another 3 premium and so on, so why is it more optimal to sell a lower theta position? Also the longer to expiration position has 3 times more time to go in an unfavourable direction.

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  • $\begingroup$ What are the corresponding IV values for each expiration in your example? $\endgroup$ – baerrus Aug 15 '15 at 2:16
  • $\begingroup$ You can't just look at the theta, you also have to take into account risk, the amount of margin you have to put up (which are high for short term options), etc. $\endgroup$ – Alex C Aug 15 '15 at 2:55
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If you assume that IV of different expiration options is equal, then it mathematically follows that you are correct. Weeklies would give you the maximum theta decay. That is the theoretical answer.

In practice, you may not have weeklies on every stock or index and you might have them but they trade too thinly. Wide bid/ask spreads etc. Also sometimes there will be a sizable skew between the expirations and you would want to sell the higher one.

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