Timing is Everything with Trading Stocks and 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 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 my option trading it always starts with the charts and technicals. When a chart shows its merit for a potential trade then we shift to the options montage to find the best fit strike and month. But while my read on the chart is not random, I cannot control the time frame for when that stock will make its move. Ever been there before when you make a good call and you just run out of time? Yep, been there myself many times I'm quite selective when it comes to my choices but I don't always pick it right, sometimes coming up short in terms of timing, other times missing the strike or dealing with 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, 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.
But I always want to define risk, as this strategy carries higher risk. Hence, this trade structure requires some protection, so I will create 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. By being on the other side of the trade time is NOW on my side, riding out the trade to the end is the goal since rougly 80% of options expire worthless every expiration period.
This timing bet is great in times of low/declining volatility but is not a bullet-proof method. Clearly being a premium seller is a great way to capture premium but if wrong you can be put the stock at a lower (or higher) price, which can fit within timing/price investment strategies. We see big hedge funds and other managers doing this exact prudent strategy day after day.
Bob Lang is an options trader and one of the industry’s leading technical analysts. He 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. In addition, he was selected from many other candidates to co-manage TheStreet's Trifecta Stock Service. Connect with Bob at: Twitter, Facebook, Google+, LinkedIn.
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