Ken Trester

Short-Term Gains Using Long-Term Options

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TAKE A LONGER-TERM VIEW OF SHORT-TERM MOVES

Options value tends to dissipate quickly in the last six months before expiration, with the time decay being most-rapid as their last trading day approaches. So if you own a LEAP that is out-of-the-money when it moves into its final six months of life, you should strongly consider closing your position.

Another key to buying LEAPS and in-the-money options is to make sure that you are paying a fair price. These options cost more than short-term, out-of-the-money options, so your risk in the event of a price collapse is greater. The less money you have on the table, the less your risk will be.

One of the beautiful things about buying LEAPS is that many tend to be undervalued because option traders mainly focus on trading short-term options and simply extrapolate short-term trends out into the future to find a price for a LEAP.

If it's a stock that you would consider owning for the long term, regardless of any short-term moves that might be caused by the shares trading with the broader market trends, then you may want to test-drive the stock by owning the LEAP first and then using the option to buy shares at the strike price whenever you're ready.