Uncle Frank,
You make valid observations about the decay rates of time premium favoring near term calls. The math is indisputable. But I don't see how that leads you to your conclusion:
The problem as I see it is that dips in the price of the underlying don't affect a cc with 3-4 months remaining on it very much. To my way of thinking, the danger of the stock "getting away" from you (going deep itm) is much greater on long calls. That's why I've stuck with front monthers.
The first sentence is correct. Mid term option prices are more stable than near term in the sense that "delta" canges more slowly. So if you start off with ATM options with a delta of near 50%, the mid terms will stay closer to 50% as the stock moves than the near terms. Conversely, the near terms changes faster, which means that if the stock goes up you reach the point of making no additional gain faster (getting away), and if it goes down you reach the point of where the call is almost worthless faster. To my way of thinking, the danger is greater for the near term calls.
I think that alanrs is correct in observing that it is a bit more complicated than just comparing time premium per month, and that is especially true when you start looking at OTM calls. Many call writers are not content to write ATM because that eliminates all potential gain from a rising stock price. OR, once a stock has moved so that the written calls are no longer ATM, the situation becomes different in that the time premium of the call represents a relatively small portion of the potential gain of a cc position. When that happens, the rate of change of time premium becomes much less important, and the stability of the time premium for the mid term calls is advantageous.
Under a certain set of circumstances, you are right that near term calls afford the best payoff. IMHO those circumstances are when you write near ATM calls and the stock does not move very fast of very far from month to month so that the time premium is a dominant fraction of the overall gain (or loss). In other words, it is best for low volatility stocks. In what seems to be more common with the majority of stocks these days, relatively large moves in relatively short times, the gain or loss becomes dominated by the move in the underlying and the mid term options are preferable. A few experiences of having a stock move 20% to 30% in a few days after you have captured a 5% or less time premium for a near term call tends to make the longer term options a lot more attractive.
It's just another opinion, and differences of opinion make the world go round.
Dan |
