Have you ever been in a situation where time just seemed to crawl along for days at a time?

Visiting relatives while on vacation is what does it for me. I grew up taking active vacations as a kid: camping, fishing, water-skiing, getting sunburned. My wife took vacations to visit relatives, so to keep marital harmony, we compromise.

When we’re spending our days snorkeling and hiking, it’s like time gets a turbo-boost and before I know it, the week is gone. When we’re on the relative-visiting trips and I hear for the fifth time in one day, “Uncle Jerry, do you want to play a game of Monopoly,” I end up counting down the days that I can be back in my own bed. I find myself urging time to go faster, but it never cooperates and I probably miss some great vacation moments.

IT’S LIKE OPTIONS

It turns out, there’s an analogy to trading options in here. Option selling has become more popular over the last several years, particularly Covered Call strategies and Credit Spread strategies.

ALL ABOUT TIME

The main arguments for selling options are that most options expire worthless, and that selling options puts time on your side. I want to focus on the “time” aspect. On the surface, the argument sounds great. You sell an out-of-the-money option or an out-of-the-money credit spread, and then you get paid to wait. The inevitable time decay of the option, which is the bane of option buyers, works in your favor.

What’s even better is that you don’t even need to be entirely right about the underlying stock. By selling options, you are trying to predict where the underlying stock is not going to go. An out-of-the-money Put credit spread, for instance, will make money if the underlying stock goes up, if it stays flat, or even if falls somewhat, provided it doesn’t fall all the way past the strike price of your short Put option. The profit graph of a Put credit spread will typically look something like the chart below.

VerseputFeatureOct24.jpg

HOW IT WORKS

As long as the underlying stock price stays where it is, the position gains a little bit of time value each day. If the stock price goes up, it gets closer to the maximum profit and adds safety to the position. These are great selling points for an option selling strategy, but what lifestyle does it create? If I have a portfolio full of Credit Spreads, or Covered Calls, or (gasp) naked short options, I end up trying to get time to hurry along.

WAITING FOR EXPIRATION

I breathe a sigh of relief each day when the trading bell rings without a collapse in my positions, and I know I’m one day closer to the Expiration Friday finish line. And the days move slooooowly. When it’s Tuesday, I can’t wait to get to Wednesday. When it’s the first Friday of the month, I can’t wait to get to the second Friday of the month.

MAKING MONEY IS ADDICTIVE

Most days I make a little money, which is addictive. As with most addictions, the addiction creeps up on you. It wasn’t until a market maker friend of mine asked me “Is that really the way you want to live” that I realized I had created an attitude and a lifestyle for myself that I never intended. If I make money simply by the fact of time going by, I will naturally want time to go by faster, and that creates a danger of missing out on life. If you feel this happening, the movie “Click” would be a good one to watch.

PAY ATTENTION

I’m certainly not advocating that traders shouldn’t sell options. After all, someone has to. However, they should also pay attention to the unintended consequences of certain strategies.

The unintended consequences of option selling strategies, particularly strategies where the potential rewards are relatively small and the possible risks are large (e.g. out-of-the-money credit spreads). Why? They can include a level of anxiety while the market is open and positions are at risk, a feeling of relief on the weekends because the market is closed, and a general sense of wishing it was later in the day, or later in the week, or later in the month, simply because you would be closer to the payday on expiration Friday.

If you realize you’re starting to experience these feelings, it may be time to rethink your strategy.

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Check out this gold options trade idea here.