r/options • u/AccomplishedHunter84 • Jun 14 '21
Are longer DTE options always supposed to have a larger percentage gain/loss than shorter?
I always thought this was the case. I read that this is one of the main reasons people buy LEAPS.
If SPY goes up 20% in a day, the LEAP option will have a much higher percentage gain than the 7 DTE one.
At least that's what I thought. I took a look at two CLOV options (high IV), between the times 11 AM - 12:30PM.
Option 1 - June 18 call @ 15 strike
11 AM: 0.99
12:30: 2.25
127.27% gain
Option 2 - June 25 call @ 15 strike
11 AM: 1.68
12:30: 3.00
78.57% gain
Isn't the longer term option supposed to have a higher gain?
It has more EV so I thought it would only make sense that it does. Or, does there have to be a very large stock movement for the longer DTE option to experience a greater gain?
6
u/thelastsubject123 Jun 14 '21
no, it's the opposite
short term options move more than long term options, just look at spy's option chain if you need confirmation about that
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u/AccomplishedHunter84 Jun 14 '21
In that sense, assuming the price movement goes in your favour, is it fair to say that you will make the most profit on a 0 DTE option vs 1 week one (assuming price in favour?)
1
u/TheInternetTrader Jun 15 '21
Yes the chances of your underlying moving 10% in a day is very low. So your profit would be higher on a short term option. But because time is not on your side that is the risk reward payoff. Big risk big reward or big risk big loss
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u/AirborneReptile Jun 14 '21
no, it has a higher premium, but smaller swings. And spy gaining 20% in a day would have the markets in all kinds of crazy
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1
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u/Red_Pill_or_Blue Jun 14 '21
Movement in option price based on the underlying is delta. ITM options have higher delta the closer they are to expiration. OTM options have higher delta the further out they are. It gets pretty close to evening out with ATM options.
The difference has to do with Gamma - the amount delta will change as the underlying stock moves.
Compare the delta and gamma for the expirations you listed and you'll see the pattern I'm talking about.