Front month options are the nearest term expiration cycle options. Since most option expiration cycles are 4 weeks, it is the option that expires in less than 4 weeks or less than 30 days. On the normal option pricing screen, these are the options with the most recent expiration month. See the chart below for reference.
Why Trade Front Month Options?
Typically, front month options attract the most volume because there are “next in line” to expire every month. As a result they offer a bid/ask spread that tends to be tighter. A great way to trade front month options is for hedging purposes. Since you are not going to need the protection for months and years, front month options offer a cheap (yet very effective) way to hedge and expiration volatility. While we don’t hedge consistently each month since we are already extremely conservative in our trading, from time to time we will enter front month options to be used as a hedge for any market disasters that may arise.
Why NOT Trade Front Month Options?
Even though you get “cheap” prices for front month options, the premium you just paid gets quickly eroded away with the passing of time and the time decay or Theta. Therefore, if you do choose to buy front month options, please keep in mind that stock market moves need to take place quickly because the option to lose value on a daily basis if the stock trades in a great range.
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