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If you're just getting started with trading options, you may run into a financial adviser or broker telling you stay away from them.
You'll hear that options are "too risky!" (which we've already proven is untrue) or "too complicated!" (also untrue)…
"Options are fixed-time investments that expire on a specific date!"
That is true. But that "fixed-time" feature doesn't have to work against you. Quite the opposite. It gives you the flexibility to focus your trade the way you want to – a flexibility you don't have with a straight long or short equity position. But you need to know how to use it.
If there's one thing you need to know about options, it's how to handle this "fixed-time" aspect of trading them. Picking the right expiration date can make the difference between a small 15% gain and a huge 300% winner.
So today, I want to spend some time helping you get this all down pat, so all your broker reps will need to do is provide you the most efficient means of executing your orders. (Heck, if you're using an online platform, you may never have to talk to them at all.)
And then look out for my email next week, when I'll show you how to focus your trade by picking the right expiration, as well as my personal favorite timeframe for trades.
Let's jump right in.
Note from Tom: I am primarily going to discuss dealing with time on straight options trades, meaning buying call or put options. I will, however, follow up with an observation about the loophole trade and a benefit of this type trade over a straight option trade.
How Expiration Dates Work When Trading Options
When you buy an option to open ("open" means to enter or start the trade), you then have the right, but are not obligated, to either buy stock from someone – a call – or sell stock to someone – a put.
The option has a strike price as well as an expiration date, both of which you choose.
You have some amount of control as to what expiration date you purchase, based on what expiration dates are available to you.
On optionable stocks there will always be expirations for the current month and the next month out. For example, here we are in August. There will be August AND September expirations. Then options fall into whatever option cycle they are a part of.
The standard expiration for each month is considered the third Friday of each month. There are weekly options on some of the more liquid stocks.
Reminder: The current month plus the next month will likely always be available to buy and sell. If you are looking at an option chain for a stock on the FMAN cycle and we are in August, you will likely see August and September options listed, but none for October.
There may be some options for out in January of next year and maybe even January of the year after that. What in the heck are those? Those are LEAPS, which stand for Long-Term Equity Anticipation Securities. They are pretty much the farthest-out option expiration available, out as much as three years.
How Time Value Works to Inform Pricing
About the Author
Tom Gentile is one of the world's foremost authorities on stock, futures and options trading.
With more than 25 years' experience trading stocks, futures, and options, Tom's style of trading systems and strategies are designed to help individual investors propel themselves past 99 percent of the trading crowd.