This Chart Shows the Biggest Mistake Options Traders Make
In my younger years, I spent summers as a lifeguard at the Jersey Shore.
Our beach was one of the busiest in New Jersey, with thousands of daily patrons.
When the ocean was rough, our crew would make dozens of rescues in a single day.
The overwhelming majority of ocean rescues involve a swimmer caught in a riptide.
From the lifeguard stand, it looks like the victim is “swimming on a treadmill,” as my beach captain liked to call it.
If you ever find yourself in this situation with no lifeguard around, it’s important to stay calm and not fight the current. You’ll risk tiring yourself out.
Most ocean victims are good swimmers. They just don’t understand the dangers of swimming against the rip.
That’s why part of our job as lifesavers was to be preventative. Our focus was keeping bathers out of dangerous situations.
There’s a valuable lesson here for options investors.
It’s the importance of swimming with the natural direction of options, not against them.
Options Lose a Little Bit of Value Every Day
When you buy an option, whether it’s a call or a put, there’s an embedded premium in the price.
If you buy an option with more time to expiration, that premium is typically higher.
And this is the biggest mistake that most options investors make.
They don’t realize that the option they own is losing a little bit of value every day.
Professional traders call this “time decay,” or its Greek name, “theta.”
Think of time decay like a rip current pulling you out to sea.
You need to keep swimming just to stay in one place. If you stop moving, you’ll be carried out to sea.
But it gets even worse.
As options get closer to expiration, time decay accelerates. This means they lose value even more quickly.
This is equivalent to the rip current getting stronger.
This simple chart illustrates what I’m talking about:
In general, options slowly decay with over a month to expiration. But once they get inside 30 days, it’s like watching that rip current become a treadmill.
And if you’re buying options inside of 30 days, you’re always fighting this natural tendency.
That’s why my favorite options strategy involves selling, not buying, options as they enter into the fastest decay of their lifespan.
And I’ve put together a special presentation that helps investors capitalize on this decay.
It teaches investors how to use that rip current to their advantage.
I’m excited to share this presentation with you next week.
Meanwhile, check your upcoming Winning Investor Daily emails to learn more about my options strategy.
Editor, Strategic Fortunes
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