Option players have the dual role of being right in direction and time.
Options, of course, have a shelf life and will expire. On the other hand, stocks generally don’t have this leash to deal with. But options provide attractive leverage versus stocks, and that can be well rewarded with nice gains if the timing is right. Recently in our service we bought some GE calls that were at the money but still had some time decay in it.
Now, I was faced with scrutiny over this play (based on the chart, a discussion for another column) – things like, ‘GE is slow and boring, we can’t make money on it.’ Well, we followed the money flow, held onto the trade for a few weeks and scored a nearly 200% win. While this trade was not full of time there was enough there to let us stay on the trade long enough (and through earnings). Think about this win for a moment – how long would you have to wait for GE to nearly triple its price? I would say far longer than the three weeks we were in our trade! Now that’s what I call leverage!
Sometimes the bet has to be made with some discretion and the time element is the unknown factor or wildcard. A bad earnings report can be hidden in a stock but just waiting it out longer, that luxury does not exist when playing options. If you buy time, you are entitled to use the time – all of it, right up to the deadline. Of course, that bothers many – riding a trade out to the end seems counter-intuitive when time is decaying, but that is the nature of options. We have seen option trades turn from big losers to huge winners just in the last moments of the option life. Naturally, this is not for everyone but understanding risk is essential.
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Bob Lang has been managing private options trading accounts for clients since 2004 and providing subscribers with guidance on trading options for income at Explosive Options since 2011.
