Dawn Pennington

Time, Price and an Option's Profitability

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WHEN IT'S TIME TO BUY, BUY TIME

The closer that option is to its expiration date, the less value it has, especially if its prospects of finishing profitably are looking slim. That's because part of an option's worth is known as time value (that is, the more time you can give the stock to move, the more valuable the option therefore is).

So, it might be possible for that $45 stock to go up five or more points, but if you expect it to happen in a couple of weeks, you may lose out on this potential upside. However, if you foresee a stock making a 5-point move in the space of six months, you may want to buy a call option that expires nine months from now.

You can always exercise or close your position at any time during the life of the options contract. And frankly, it's often wise to take advantage of time value and take profits on your trade sooner rather than later, especially if the underlying stock has hit its target trading price.

Yes, it's possible that the stock might keep going up. But there's also a chance that it will reverse course and go down before the option expires or the position is closed.

However, if you buy a call option with a $50 strike price while the stock is trading at $52, the option is already in-the-money. And buying in-the-money calls is fine as long as you have time on your side.

AT EXPIRATION TIME, WHAT MAKES YOU A WINNER?

But if you buy the call two weeks before it expires, you're probably not going to make too much of a profit. But if you buy options with significant time left before expiration, you are giving the stock three extra months to make an even-bigger upward move, which would typically make your option profitable.