Please guide the factors to be considered while selecting the monthly options, namely, current, mid and far month
Here are a few things to consider:
What is your thesis? If you are trading directionally or based on volatility, what is the timeline for the move to occur? This should be the biggest driver in expiry selection. If you are less confident on the timing, then you could select the next further expiry. Keep in mind, the further out the expiry, the more you will pay (if you are going long). In addition, the contracts will be less liquid resulting in paying even more due to a wide bid-ask spread.
What strategy are you deploying? If you are going short / collecting premium, then you will collect more premium for further out expiries. However, time decay won’t work as much in your favor for the further out expiries. As a very general rule: if you are shorting options, you want less time until expiry so that the contract’s time decay will be more beneficial and improve the chance that the contract expires worthless (a good thing when going short). Alternatively, if you are going long, you are paying less per-day in time premium for further out expiries (but it will be more expensive because of the more days until expiration).
What does liquidity look like for the strikes you are interested in? Strike selection allows you to balance max gain, max cost/loss, and probability of profit. However, if there are certain strikes that are critical for your success but they aren’t liquid far out, then you may need to consider changing the strike or choosing a nearer expiry. However, just because something is illiquid now, it doesn’t mean that it will be illiquid in the future. The challenge is that you may end up giving up significant ‘edge’ due to the bid-ask spread on entry into a less liquid strike.