Diversifying risk through various durations

Laddering Options Expiration Dates Reduces Risk and Increases Success

By:Kai Zeng

The strategy is especially beneficial with the one-standard-deviation strangle of selling a put and a call

Traders are always looking for ways to optimize their portfolios, and one such strategy is diversifying expiration dates in options trading—or what's known as "laddering" positions. This technique involves spreading out options contracts across differing expiration cycles instead of concentrating them in a single period.

Consider a scenario where a trader is looking to sell puts on the SPDR S&P 500 ETF Trust (SPY). Traditional trading might involve selling three puts, all with a 30-day expiration. However, by adopting the laddering strategy, the trader could diversify by selling one put with a 30-day expiration, another with a 60-day expiration and a third with a 90-day expiration. This not only spreads the risk but also creates a buffer against market fluctuations.

Historical analyses of 30 delta SPY Put options have shed light on the effectiveness of this laddering strategy. The traditional method of selling puts within the same expiration cycle might offer a higher average profit because of the shorter duration, but it comes with a higher risk. On the other hand, a laddered approach tends to demonstrate lower daily profit and loss (P/L) volatility as a percentage of the maximum potential profit. This results in a more consistent and less-volatile investment experience.

Average P/L

Moreover, when traders employ neutral strategies like the one-standard-deviation (SD) strangle, which involves selling a put and a call, the benefits of laddering become even more pronounced. Strangles inherently provide a wider profit range, which can be particularly useful in markets that lack significant directional movement. Even in this scenario, laddering helps reduce volatility, making it a valuable tactic for those employing strangle strategies.

30 delta puts and volatility

The use of strangles, combined with the laddering of expiration dates, offers a compelling case for traders who seek to balance their need for profit with the management of risk. Even during a bull market, where naked puts have shown exceptional performance, the added stability of a laddered strangle strategy could be a prudent choice for traders aiming to maintain a steady portfolio.

SPY 1SD Strangle

In conclusion, diversifying option positions across multiple expiration cycles through laddering can lead to reduced portfolio risk and an increased rate of success. While it may require sacrificing some profits, the trade-off for a more stable and reliable investment strategy could be well worth it.

Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1 

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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