Why do you like to go so far out (month-wise) when you offer a stock that is optionable? (April 11, 2002)

  One thing we have found over the years is that time can be your friend, particularly when the market is choppier as we have seen of late. With options one of the things you are paying for is time. The more time you buy before expiration, the more you pay for the option. Many option players buy same month expirations; they are speculating. They have to be right on the movement and have the timing just right as well. When an option gets within 60 days of expiration it starts to lose value based on eroding time value. When it gets within 30 days, value is bleeding away rapidly, particularly if the option is out of the money. It can be impossible to ever get back your investment. Though we pay more for longer term options, we don't have to be right to the minute on the buy. We try to focus on the best point to buy, but we also recognize that a stock can start a move and then stall a bit, or take a consolidation, then resume the move. With extra time that rest period does not cost us much in lost time value. Thus we are not continually trying to make up lost ground. It acts more like the stock: when it is not moving, the value is not eroding away on us. That helps take out some of the emotion of option investing.

It is not perfect; if the stock falls, the option value will fall as well and you may not recover even if the stock does. You still have to enforce loss rules. If the pattern breaks down you don't know when it will recover. If it takes too long, you end up losing more than if you cut your losses and looked for better game. When selling options we put time on our side because the time decay works for us along with any price movement in the direction we want. We really like selling options and we discuss how we do that in our online seminars in the Options You Can Use Seminar.


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