What is the advantage and disadvantage of using short-dated (1 month) options versus longer-dated (3 months)...
What is the advantage and disadvantage of using short-dated (1 month) options versus longer-dated (3 months) options to hedge the position?
Homework Answers
The advantages of using short term options:
1. Liquidity and huge trading volume.
2. Tend to be more volatile. (Options more volatile the
better).
3. Less premium per option than compared to long term option.
Disadvantages of short term options:
1. Less time to Expiration means less chance of a profitable
hedge.
2. Can't take advantage of long term news.
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