Back month stock options have more than one month before they expire. They are slightly less liquid than front month options and they typically have wider bid/ask spreads. They are well-suited for option traders who want to give the trade more time to work out. The options are more expensive on a dollar basis because the trade has a greater probability of working out than a front month option with the same strike price. Back month options do not depreciate as quickly as front month options. Stocks that are in a long-term trend tend to be well-suited for back month option purchases. If the stock stalls for a bit, the trader can stay with the position because there is plenty of time for the momentum to reestablish itself. Option sellers don’t normally like to trade back month options because they have to carry the position for a long period of time. The longer time frame introduces the chance for a surprise event and premium sellers have limited upside and unlimited downside. They also like to take advantage of accelerated time premium decay and back month options hold their value much better than front month options. Option sellers should try to stick to front month options.
Back Month Option Term
November 11, 20082 min read