Can You PlayTime Decay?
Is time decay playable? It is.
As you know, when you buy or sell an option, part of the price you pay or receive is because of the amount of "time" left between the day you place the trade, and the day the option expires.
So, if time decay causes the price of a call option to fade, is this something we can play? Yes it is.
A better question is, "should you?" Like many questions about the market the answer isn't easy to spout off.
I know people that have done quite well with this strategy, but naturally, it comes with risk.
(doesn't it all?) The most common practice is to sell a call option.
Lets say you really see no reason for a company to move higher.
Better yet you see a good reason for it to go lower.
So, you sell a call option against that stock.
Instantly you have taken in a premium.
Now if the stock goes down, you can either buy the call back for less money, and pocket the profit, or try and ride it to "0" and keep all the premium.
But what if it doesn't go down? What if it just sits there? Ahh, that's just as good.
Why? Because the time portion of the premium is eroding.
let me give an example ( a very basic example).
Lets say the XYZ stock is at 50.
00.
You see no reason for it to move higher at all, in fact it could go down.
So, you see the 60 dollar XYZ July calls are a dollar.
So, you "sell" ten contracts of XYZ 60 dollar calls.
"boom" you just took in 1000 dollars.
Now if XYZ the stock goes to 40 dollars, those calls are going to fall in value and eventually expire worthless.
You get to keep the full 1000 dollars.
But and this is neat, if XYZ just sits between 50 and 54 you will still make money.
How? Since the stock is below the strike price you sold, it's still a worthless option and you get to keep the premium.
So, in a flat to fading market, selling calls is about the best thing one can do to bring in the bucks.
But like all things, there is risk.
If the call you sell happens to go higher and higher, it's going to cost you plenty.
You'll have to cancel the contracts by buying them back at a higher price than you sold them at.
That hurts.
The bottom line is remaining aware folks.
If you use good risk management techniques, this is no more dangerous than any of the other games we play in this market.
But if done correctly, you can pick off some tasty profits.
So, don't forget this investing angle.
As you know, when you buy or sell an option, part of the price you pay or receive is because of the amount of "time" left between the day you place the trade, and the day the option expires.
So, if time decay causes the price of a call option to fade, is this something we can play? Yes it is.
A better question is, "should you?" Like many questions about the market the answer isn't easy to spout off.
I know people that have done quite well with this strategy, but naturally, it comes with risk.
(doesn't it all?) The most common practice is to sell a call option.
Lets say you really see no reason for a company to move higher.
Better yet you see a good reason for it to go lower.
So, you sell a call option against that stock.
Instantly you have taken in a premium.
Now if the stock goes down, you can either buy the call back for less money, and pocket the profit, or try and ride it to "0" and keep all the premium.
But what if it doesn't go down? What if it just sits there? Ahh, that's just as good.
Why? Because the time portion of the premium is eroding.
let me give an example ( a very basic example).
Lets say the XYZ stock is at 50.
00.
You see no reason for it to move higher at all, in fact it could go down.
So, you see the 60 dollar XYZ July calls are a dollar.
So, you "sell" ten contracts of XYZ 60 dollar calls.
"boom" you just took in 1000 dollars.
Now if XYZ the stock goes to 40 dollars, those calls are going to fall in value and eventually expire worthless.
You get to keep the full 1000 dollars.
But and this is neat, if XYZ just sits between 50 and 54 you will still make money.
How? Since the stock is below the strike price you sold, it's still a worthless option and you get to keep the premium.
So, in a flat to fading market, selling calls is about the best thing one can do to bring in the bucks.
But like all things, there is risk.
If the call you sell happens to go higher and higher, it's going to cost you plenty.
You'll have to cancel the contracts by buying them back at a higher price than you sold them at.
That hurts.
The bottom line is remaining aware folks.
If you use good risk management techniques, this is no more dangerous than any of the other games we play in this market.
But if done correctly, you can pick off some tasty profits.
So, don't forget this investing angle.
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