What are Long-dated Options?

Numerous professional investors earn almost all of their profits from Options trading. Options are contracts that grant the holder the right but do not bind them, to either buy or sell a sum of some underlying asset at or before the contract expires at a fixed price. However, if almost all the profits are coming from Options, what about diversification?

Investors prefer to diversify within the Derivatives domain by choosing various asset classes such as stocks., currencies, commodities, etc., as their Options contract asset class. Furthermore, the most important thing for Options traders is to diversify the time horizon of their tradeable contracts. For example, they choose a contract that matures in some months and simultaneously buy an Options contract with multiple years of maturity. This allows them to hold the contracts for better returns over a long period.

Since a common Options contract has an expiration date of three months, traders buy Long-dated Options to increase their time horizon and diversification through different periods.

What are Long Dated Options?

Options traders who prefer to differentiate between short-term investing and long-term investing choose two different types of Options: short-dated options and long-dated options. Long-dated Options contracts have a maturity of 9 months minimum, extending to up to 3 years. Through these types of Long-dated Options, traders aim to duplicate the exposure of index futures.They do this by creating positions in Put and Call Options and ensuring the contracts have the same strike price and expiration date.

Long-dated Options allow traders to mitigate downside risk if the market is overbought, and there is a chance that it can correct itself and fall below the current level. Furthermore, Long-dated Options provide a great cost-effective way to gain long-term exposure with a smaller capital outlay.

What are the features of Long Dated Options?

The features are as follows:

It allows traders to mitigate risk by holding the contracts for a longer period.

  • Long-dated Options have a minimum maturity period of 9 months.

  • The bulk of activity in Long-dated Options is for synthetic forwards to replicate the returns.

  • Long-dated options manage the market’s downside risk as in the longer term; the market can rise steadily.

Long Dated options offer immense diversification opportunities to Options traders along with offering a profit-making opportunity with low capital outlay. Therefore, they can invest in the same asset with two-time horizons and make profits in the short and the long term. However, if you are thinking of entering the market with long-dated call options or long-dated put options, you should note that Long-dated Options are only available on less than 100 stocks and also do not pay dividends, unlike shares. To gain more clarity on what longer-dated options are called and how they can help you earn better profits, consult with the experts at IIFL.

Frequently Asked Questions Expand All

Long Dated Options contracts have a minimum maturity time of 9 months, going up to 3 years.

The Options series available for Long Dated Options is last Thursday of every month. If Thursday is a holiday, the contracts expire one day before.

Long Dated Options require less capital than other contracts that have a lesser maturity period. They allow traders to mitigate the risk of exposure to the market at a time when it is experiencing a downtrend. Long Dated Options can also prove to be more profitable over time.