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This Chart Shows the Biggest Mistake Options Traders Make

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:

expiration time remaining options trading

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.

Regards,

Ian King cryptocurrency bitcoin expert at banyan hill publishing signature

Ian King

Editor, Strategic Fortunes

 

Morning Movers


From open till noon Eastern time.

 

Virgin Orbit Holdings Inc. (Nasdaq: VORB), billionaire Richard Branson’s recently public space launch company, is up 17% this morning. The move is in anticipation of the launch window for its third commercial flight, Above the Clouds, which opens Wednesday.

 

Digital World Acquisition Corp. (Nasdaq: DWAC), the SPAC that is taking former President Donald Trump’s social media platform public, is up 14% today. The stock is up on general excitement and positive media attention over its rapid run-up in December.

 

Shake Shack Inc. (NYSE: SHAK), the burger-chain operator, is up 13% this morning. The move came after it released preliminary results for Q4 and full-year 2021 that shows the company beating analyst expectations.

 

BioCryst Pharmaceuticals Inc. (Nasdaq: BCRX) discovers and develops oral and small-molecule medicines. It is up 13%, continuing its rally from Monday when it released preliminary revenue figures for 2021 and provided guidance for 2022.

 

FuboTV Inc. (NYSE: FUBO) operates a live TV streaming platform for live sports events, news and entertainment content. It is up 12% after it released preliminary Q4 results showing that it exceeded previously set guidance.

 

Micro Focus International plc (NYSE: MFGP) engages in the enterprise software business internationally. It is up 12% after unveiling a new cybersecurity product that provides actionable and business-centric intelligence for security executives.

 

Illumina Inc. (Nasdaq: ILMN) provides sequencing and array-based solutions for genetic and genomic analysis. It is up 11% after analysts at Barclays upgraded the stock to an equal-weight rating, and analysts at SVB Leerink raised the price target on the stock.

 

Oak Street Health Inc. (NYSE: OSH) offers health care services to the patients in the U.S. It is up 10% this morning as investors saw a buying opportunity after the stock started a downward slide at the beginning of the year.

 

MercadoLibre Inc. (Nasdaq: MELI) is a Latin American e-commerce and financial technology company. It is up 10% on a rebound today after dropping Monday along with other growth stocks on the signals that interest rates might need to be raised faster than originally planned.

 

Lithium Americas Corp. (NYSE: LAC) is a lithium mining company that operates in North and South America. It is up 10% after Deutsche Bank and Piper Sandler upgraded their ratings on the stock to a buy and overweight, respectively.

 

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