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Michael C. Thomsett is a widely published options author. His "Getting Started in Options" (Wiley, 9th edition) has sold over 300,000 copies. He also is author of "Options Trading for the Conservative Investor" and "The Options Trading Body of Knowledge" (both FT Press); and "Options for... More
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Getting Started in Stock Investing and Trading
  • The Options Dilemma — Cost Versus Time 0 comments
    Jan 13, 2014 5:34 PM

    Every options trader faces the same dilemma: How can you get the maximum time before expiration, while also paying the lowest possible cost for the position?

    The solution is to not make the mistake most long options traders make: speculating without an underlying signal. If you want to trade long options, seek a few sensible signals to avoid this common dilemma. These include:

    1. Reversals found in candlestick indicators and confirmed by secondary indicators, letting you time your trade to enter at the bottom of the swing (for long calls) or at the top of the swing (for short puts). If you do this, you don't need the time because you expect the price to react immediately. If you use this technique, you can also use options expiring in a month or less. This means there is little time value remaining, so the option will be cheap.

    2. Reversal signals found in price patterns. Use Western technical signals like double tops or bottoms, head and shoulders, triangles or wedges, and strong price gaps. Also be aware that reversal is most likely to occur when price approaches or breaks through resistance or support. This is the best location for entry.

    3. Reversal signals based on momentum oscillators. These are signals based on tracking of the strength or weakness in the current trend. Once signals move into overbought or oversold conditions, they provide strong reversal flags. That's the best time to act, as long as the oscillator confirms a separate signal.

    Focus on opening long positions as close to the money as possible. Too much time value means even a profitable move may be offset by rapid time decay; and too much intrinsic value equals higher cost.

    You do not have to live with the common time versus cost dilemma. You can manage trades to take advantage of time and proximity to improve entry and exit timing and to reduce the risk of loss in long options.

    To gain more perspective on insights to trading observations and specific strategies, I hope you will join me at where I publish many additional articles. I also enter a regular series of daily trades and updates. For new trades, I usually include a stock chart marked up with reversal and confirmation, and provide detailed explanations of my rationale. Link to the site at to learn more. You can take part in discussions among members on the site at the Members Forum.

    I also offer a twice-monthly newsletter subscription if you are interested in a periodic update of news and information and a summary of performance in the virtual portfolio that I manage. Join at Newsletter - I look forward to having you as a subscriber.

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