Options decay as time goes on. They are a wasting asset.

This time decay happens whether the market is open or not. 24/7, every day, including weekends and holidays.

It also makes perfect sense when you think about it. Time adds value to options. Think of a put as an insurance policy against a decline in the price of your stock. Any insurance policy will cost more if you are insured against a longer period of time. A fire insurance policy on your home will cost more if you are insuring for a whole year as opposed to a week, right? The same holds true with options.

This means that if you own options as time goes on you are going to need a bigger move to make money. Let’s say a stock is at 90 and you think it will go past 100 and you buy the 100 call. So you expect the stock to rise more than 10%. Well, with 3 months to go there is a better chance of a 10% move happening during that time as opposed to 3 days to go

The most frequent complaint I hear from novice traders is along the lines of “I thought the stock would go higher, I bought calls, the stock did go higher and I still lost money. How did that happen?”

What happened was only one dimension was considered, direction. When trading options one must always consider three dimensions: Direction (the what) Time (the when) and Velocity (how fast).

Teaching options trading three dimensionally is a core part of my curriculum. As always, If you have any questions about how to learn more about three dimensional options trading please do not hesitate to contact me.

While you can, because as I said a few columns ago, I will very soon not be providing my learned years of experience and wisdom for free.


About Randall Liss