Multiple Expiration Dates Change Option Risk

Lading Option Positions Across Multiple Expirations: A Research-Based Analysis

Key Concepts:

• Lading: Spreading option positions across multiple expiration dates instead of concentrating them in a single cycle.
• Delta: A measure of an option's sensitivity to changes in the underlying asset's price.
• Implied Volatility (IV): The market's expectation of future price fluctuations of an underlying asset.
• P&L Volatility: A measure of the dispersion of potential profits and losses, expressed as a percentage of maximum potential profit.
• Strangle: An options strategy involving simultaneously selling an out-of-the-money call and an out-of-the-money put with the same expiration date.
• Naked Put: Selling a put option without owning the underlying asset.
• SPY: The ticker symbol for the SPDR S&P 500 ETF Trust, a popular instrument for trading options on the S&P 500 index.

I. Introduction & The Rationale for Lading

The discussion centers around whether when you trade options – specifically, the timing of expirations – is as crucial as what you trade. The core concept explored is “lading,” which involves distributing option positions across multiple expiration cycles. The traditional approach favors a 45-day expiration, but this analysis investigates the benefits of spreading risk across 30, 60, and 90-day expirations. The primary motivation for lading is to dampen volatility, particularly when compared to concentrating positions in shorter-duration options. A key point raised is that trading further out on the curve results in less volatility exposure.

II. Implementing a Lading Strategy: Delta and Strike Selection

The conversation details a practical approach to implementing a lading strategy, specifically with put options. One trader typically lowers the strike price by one increment for each month further out the expiration is. For example, if selling a 95 put one month out on a $100 stock, they would consider a 90 put two months out, and an 85 put three or four months out. While Delta isn’t the primary focus of strike selection, the goal is to maintain a roughly 30 Delta across all expirations. It’s acknowledged that achieving a precise 30 Delta across all expirations isn’t always possible, especially with lower-priced stocks where strike price increments are wider, but the aim is to be “in the same place” – approximately one strike below the prior month’s strike for a similar Delta. The importance of using Delta as a weighting mechanism for a study is highlighted, ensuring a fair comparison between strategies.

III. Research Methodology & Data Set

The research involved analyzing 12 years of data on SPY (S&P 500 ETF) 30-Delta put options. The study compared two approaches: a traditional strategy of selling puts with a single 30-day expiration versus a lading strategy distributing the same risk outlay across 30, 60, and 90-day expirations. The analysis focused on returns, success rates, and portfolio volatility. The methodology involved calculating daily Profit & Loss (P&L) volatility as a percentage of the maximum potential profit to assess risk.

IV. Performance Comparison: Traditional vs. Lading

The research findings indicate that the traditional method (selling puts with a single, shorter expiration) yields a better average profit and is more efficient due to quicker trade cycling and compounding. However, the lading strategy demonstrates a higher success rate and lower risk. This is attributed to the lower volatility exposure associated with further-out expirations, where front-end volatility is typically higher than back-end volatility. Both strategies have been successful over the past decade, largely due to the overall upward trend of the market. As stated, “the market helped.”

V. Volatility Analysis & Risk Management

A key finding is that diversifying positions across multiple expirations significantly reduces portfolio volatility. Further-out expirations are further out-of-the-money, resulting in less volatility exposure and more time for the trade to potentially become profitable. The P&L volatility was demonstrably tighter with the lading strategy. This was further explored using a one standard deviation strangle strategy. Selling both a call and a put (a strangle) displayed lower volatility compared to naked puts, even though the naked puts performed well during the recent bull market. Selling both sides reduces overall delta exposure.

VI. Key Takeaways & Strategic Considerations

The analysis concludes with several key takeaways:

• Risk Reduction: Spreading positions across multiple expiration cycles can reduce risk and increase the success rate, albeit potentially at the cost of some profit.
• Neutral Strategies: Neutral strategies like strangles exhibit lower volatility than naked puts in both traditional and lading portfolios.
• Bullish Bias: Selling puts inherently requires a bullish outlook on the underlying asset.
• Buying Power Efficiency: Lading can be a buying power-efficient strategy, particularly in margin accounts, allowing traders to achieve a desired Delta exposure with less capital. Selling puts across multiple timeframes can approximate the Delta exposure of buying 100 shares of stock with similar capital requirements.

As stated, “If I was a long-term bull on something that had relatively high implied volatility, that might be my go-to strategy.” The overall recommendation is to intelligently manage risk and leverage the mechanics of options trading, particularly for long-term bullish investors.

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