Sometimes you give trade with options that are in the same month expiration and in others you have an expiration two or three months out. I have heard you make more money if you buy in the same month expiration as the current month. (February 27, 2002)
The closer an option is to its expiration, the more volatile it is. That means it will move more up or down in value with movements of the underlying stock than an option that has an expiration three months further out for the same strike price on the same stock. The problem with near term options is, you have to be right because there is no time to recover if the stock moves against you. The time value portion of the option is eroding at a high rate once it gets within 30 days of its expiration date. If you are wrong, there is little chance of recovery. When there is a clear downtrend in place we will use nearer term put options though we prefer to get out to the next month if possible. When things are choppy, we tend to buy more time to give us a cushion.
As noted, buying more time means our option won't move as much as a current month expiration option at the same strike price. Therefore we go deeper into the money to get a better delta. We are not paying as much for time when we do this; our money goes more to the intrinsic value of the option making it a better value. We get a better delta (movement per movement of the underlying stock) this way and we have a cushion. Thus we can still make just as much money as near term options yet have more safety because we have more time and are not subject to that fast erosion in time value of near term options.
We discuss how this works in clear detail in the Options You can Use seminar when we kick off another round in late March. Signup information will be coming soon.
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