How Does the Choice of Expiration Date Affect the Effectiveness of a Hedge?

The expiration date significantly impacts a hedge's effectiveness due to time decay (Theta). Shorter-dated options offer cheaper premium but decay faster, requiring more frequent rolling and increasing transaction costs.

Longer-dated options have less Theta decay but are more expensive, offering a more stable, though costlier, long-term hedge. Matching the option's expiration to the hedged exposure's duration is crucial for optimal effectiveness and cost management.

An ill-matched expiration can lead to under- or over-hedging.