The Secret Advantages of Trading Options

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You Need Enough Time to Be Right

Options are a wasting asset. They are not perpetual investment instruments. The closer you get to expiration, the faster the option decays. If you think about why that is, you’ll understand the concept without going back to your college calculus book.

Picture two options contracts, both at the same strike price but at different expirations. So we’re looking at Option A that expires on March 20 and the other (Option B) that expires 28 days later on the third Friday in April.  

At the beginning of March, Option A will have 20 days left until it expires and Option B will have 48 days left until it expires.

In those 20 days, Option A will either turn into stock or it will disappear. By that I mean that the price of the stock will rise and we will exercise our call to obtain shares of stock, or we will let the option expire without exercising it.

Time decay is so intense in these options market makers will hiss, imitating the sound of air escaping a balloon! Meanwhile, Option B has 48 more sunrises and sunsets for the stock to move in their favor, so the odds significantly favor the investor that bought the option with more time.

Option buyers who find they are frequent losers rather than winners are buyers of near-term options that have stacked the odds against themselves buy buying the option with so little time for them to be right. In most all situations I want to have another month or more to be right, but in extremely heavy buying situations, I may dabble in front month options, but I do so very carefully.

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