Date: 3/24/2023
Author: Chris Hood
Most of those trading options started with stocks.
Many still combine the two.
Yet stocks and options are quite different. They price differently and have expiration dates, so you can’t just hold them forever.
You must choose the direction (if you are buying calls and puts) and when you expect the move to happen.
Get in too early, and your option can bleed out while you wait.
Inevitability this is right before you would have seen a massive profit. God knows how many times this has happened to me.
Or you miss the entry and try to get on the run-up.
Chasing options trades usually means overpaying and getting caught in a reversal.
Use these guidelines to help you pick the correct expiration date.
For intraday options, I do the following.
If it’s before 1:00 pm, I’ll trade 0DTE. After then, I’ll switch to a day or two out.
The reason is that time decay (theta) is working against you. Every second is eating away your potential gains.
For trades you plan to hold for only 1-3 days, choose an option a couple of weeks out.
Which expiration you choose is up to your plan. Minimizing time decay with further dated options is safer, but you’ll pay more.
For a trade between 1-2 weeks, use a 30-60 day option expiration.
Going past the 30-day window is always safer because time decay accelerates rapidly inside the one-month window.
Finally, some prefer to trade for several weeks or a month.
I suggest you choose an expiration twice as long as you plan to be in the trade.
So for a predicted 6-week trade, choose an expiration twelve weeks or more out.
There’s no need to go overboard.
Remember that you’re paying for time value. If you can afford a longer-dated expiration, then go for it. These will maintain their value longer and are less affected by volatility.
This is a rough guide.
Something to get you started. As you continue trading, you’ll find the right balance between cost and safety.
This will be the final installment of Hood Talk.
It’s been an honor helping you achieve your goals, and I wish you the best of luck in the future.
Cheers,
Chris Hood
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Get in while there’s still time
