As you're probably aware, a number of market systems exist that claim to be sure money makers. That shouldn't be surprising given the number of market traders expending time and effort on developing systems to capitalize on trends and anomalies within the market. But not all these systems are as reliable as they claim to be. Smart traders will choose carefully, or watch their hard-earned capital drain away.
A widely touted stock option trading strategy out there in common use today is the idea of "theta decay." At first glance, the name isn't indicative of something positive, but in reality, the concept capitalizes on a well known fact about option trading - options expire on a set date.
One result of this is that option values change over time. In particular, they change significantly when their expiration dates are drawing near. For example, options traders have learned that option values tend to drop as the strike date approaches.
The specific expiration date of options is that gives theta decay its edge. Unlike stocks, the options market has a constant and, to some, dizzying flow of information. For traders who are able to keep up with that flow, big gains await.
But how does one put theta decay to play in stock options trading? It's not as difficult as you might think. The key insight is that the time value of money changes faster as the expiration date approaches. Studies have found that an option's time value falls according to a linear pattern before reaching the last thirty or so trading days before its expiration date.
It is those last thirty days when theta decay techniques are most effective. During those last thirty days, the rate of descent for the time value becomes steeper. But you can profit from this accelerated loss by holding the right positions.
Imagine, for example, that you have an option approaching expiration and hold a short position while also selling an inverse call option. You could realize two separate gains. The first of these comes when you sell the call at a premium relative to its actual value. The second can result if the option does not finish on the positive side in money.
If you get your timing right and keep an eagle eye out for option information, theta decay is a useful tool to employ with your stock options trading. As with any system, there is always the possibility of losing your principal through incautious application of the technique. However, if you are attuned to the market and carefully scrutinize expiration dates, you can easily find yourself making money with this effective and under-utilized strategy. - 16928
A widely touted stock option trading strategy out there in common use today is the idea of "theta decay." At first glance, the name isn't indicative of something positive, but in reality, the concept capitalizes on a well known fact about option trading - options expire on a set date.
One result of this is that option values change over time. In particular, they change significantly when their expiration dates are drawing near. For example, options traders have learned that option values tend to drop as the strike date approaches.
The specific expiration date of options is that gives theta decay its edge. Unlike stocks, the options market has a constant and, to some, dizzying flow of information. For traders who are able to keep up with that flow, big gains await.
But how does one put theta decay to play in stock options trading? It's not as difficult as you might think. The key insight is that the time value of money changes faster as the expiration date approaches. Studies have found that an option's time value falls according to a linear pattern before reaching the last thirty or so trading days before its expiration date.
It is those last thirty days when theta decay techniques are most effective. During those last thirty days, the rate of descent for the time value becomes steeper. But you can profit from this accelerated loss by holding the right positions.
Imagine, for example, that you have an option approaching expiration and hold a short position while also selling an inverse call option. You could realize two separate gains. The first of these comes when you sell the call at a premium relative to its actual value. The second can result if the option does not finish on the positive side in money.
If you get your timing right and keep an eagle eye out for option information, theta decay is a useful tool to employ with your stock options trading. As with any system, there is always the possibility of losing your principal through incautious application of the technique. However, if you are attuned to the market and carefully scrutinize expiration dates, you can easily find yourself making money with this effective and under-utilized strategy. - 16928
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TheScienceOfTrading.com provides 90 free minutes of videos on option trading systems and provides a complete and detailed learning to trade options for beginners to experts.
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