On the private members forum an investor asks an interesting question on Gamma and short-term Put Selling trades.
Let’s review the question and look at some answers.
Investor Questions:
Teddi,
I don’t understand why you keep selling puts with one, two weeks before expiration in your trade recommendations. In order to gain sufficient premiums, the strikes usually have to be close to the trading prices. Even though, the short time before expiration provides the illusion of higher theta decay, and yet the positions are a lot more susceptible to risk due to increase in gamma. As a result, the unexpected consequence of selling such kind of puts is increased volatility of the portfolio P/L.
Some Answers:
While it might seem more volatile to sell options with less time to expiry versus selling options further out in time than a few weeks, often the exact opposite is true.
This article looks at understanding how Gamma works and its pitfalls when selling options versus using a tool like the Put Options Selling Tool.
This strategy discussion article is for FullyInformed Members.
Understanding Gamma When Selling Options – Investor Questions – June 26 2018
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