More Time or Less, That is the QuestionSeptember 24, 2009 | Comments : 0 Recommended this article: (0)
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In addition to determining whether you're going to buy a call or a put, the amount of time to get on your option is probably one of the most critical elements in options trading.
First off, as a rule of thumb, if you're buying an option, buy more time than less.
The illustration I'm going to go over helps demonstrate the value of this idea.
I should also say that I didn't invent this idea. I read it somewhere a long time ago, but it stuck with me because it made so much sense.
Check this out.
- November 90 Call at 7.20 has 8 weeks of time
- January 90 Call at 9.20 has 16 weeks of time
- April 90 Call at 12.15 29 weeks of time
But what if it doesn't?
You may have to wait around longer than you thought to see the stock do what you expected it to do.
As you know, when you're buying an option, not only do you have to be right on direction, but you always have to be right on your timing. In other words, will it move x amount between when you buy the option and its expiration?
Too many people skimp on time because it may cost them an extra few hundred dollars, but even a few weeks can often times mean the difference between a profit and a loss.
So when in doubt, buy more time.
And it makes good financial sense too.
Let's look at those options again:
- November 90 Call at 7.20 with 8 weeks of time
Let's divide $720 by 8 weeks. That equals 90 cents per week. So essentially, you're paying 90 cents for each week of time you purchased.
- January 90 Call at 9.20 with 16 weeks of time
$920 divided by 16 weeks = 57.5 cents per week.
- April 90 Call at 12.15 with 29 weeks of time
$1,215 divided by 29 weeks = roughly 42 cents per week.
So not only are you paying less for each week of time that you hold onto that option, the additional time will serve you well by giving you a greater opportunity to see the stock move in your direction.
Moreover, since time decay deteriorates the fastest within the last 45 to 30 days prior to expiration, the additional time gives you more of an opportunity to stay out of that critical time period when time decay works against you the most.
And as you approach that window of rapid time decay and still feel like you need additional time to see the stock move the way you had expected, consider rolling that option into a new one with more time on it; this will once again increase your chances of success.
So when deciding which option to buy, consider getting a little more time than you think you'll need. That'll increase your chances of success by giving you more time for the trade to work out and, as the above illustration shows, it's often times the better value.
You can learn more about different option strategies by downloading our free options booklet: 3 Smart Ways to Make Money with Options (Two of Which You Probably Never Heard About). Just click here.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
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