Time to Profit

10/24/2013 8:00 am EST

Focus: OPTIONS

Bob Lang

Founder and Chief Analyst, Explosive Options

Bob Lang of ExplosiveOptions.net outlines the strategies he uses to turn time to his advantage in trading options.

Timing: As hard as we try, we don’t always get it right. This is especially true with trading, and I can tell you from personal experience that the frustration mounts if I make a good call but the timing is off. However, that frustration can be reversed by using time to my advantage. There are several ways to do this.

For me, options trading always starts with the charts and technicals. When a chart shows a potential trade, then I find the best strike and month. While my read on the chart is not random, I cannot control the time frame for when that stock will make its move. Sometimes I come up short in terms of timing; other times I miss the strike or have a disappointing outcome.

Bad timing can be an easy fix: Take an extra month (or more). If the trade is to work based on the technicals/charts, then taking a bit more time shouldn’t be an issue.

But with options, doesn’t the price go up when you take more time? Yes, it does—and that is the offset (decay) to the seller of premium.

Should we fear paying a higher price? I look at stock/option prices as a model auction, much like eBay—the highest bidder wins. If the analysis is right and momentum with speed takes over, then taking more time will be beneficial.

But how can time be a friend to you? Selling premium, or selling time, is a great way to add gains to a portfolio. It can also time your buys on a stock based on a preferred price level. I like to sell premium in client accounts, not to find better stock entry points, but rather to take the other side of a bet when markets are trending up or down. If markets are sliding, my best bet is to sell calls. When markets are climbing, I will sell puts.

Because this strategy carries higher risk, I always want to define the risk and add in some protection. I do that by creating a spread in buying a lower put (put spread) or a higher call (call spread). I have now defined my risk and potential loss to the size of the spread, no more than that. With time now on my side, my goal is to ride out the trade since roughly 80% of options expire worthless every expiration period.

This timing strategy is great to use during times of low/declining volatility, but it is not a bullet-proof method. Clearly, being a premium seller is a great way to capture premium, but if you are wrong, you can buy the stock at a lower (or higher) price, which can fit within timing/price investment strategies. Big hedge funds follow this prudent strategy day after day.

By Bob Lang of ExplosiveOptions.net

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