21 lines
1.4 KiB
Plaintext
21 lines
1.4 KiB
Plaintext
Over time, a decline of only 10 percent in the stock yields high
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percentage returns. This is due to the leveraged directional nature of this
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trade—delta.
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While the other greeks are not of primary concern, they must be
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monitored. At the onset, the 0.80 premium is all time value and, therefore
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subject to the influences of time decay and volatility. This is where trading
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greeks comes into play.
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Conventional trading wisdom says, “Cut your losses early, and let your
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profits run.” When trading a stock, that advice is intellectually easy to
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understand, although psychologically difficult to follow. Buyers of options,
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especially ATM options, must follow this advice from the standpoint of
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theta. Options are decaying assets. The time premium will be zero at
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expiration. ATMs decay at an increasing nonlinear rate. Exiting a long
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position before getting too close to expiration can cut losses caused by an
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increasing theta. When to cut those losses, however, will differ from trade
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to trade, situation to situation, and person to person.
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When buying options, accepting some loss of premium due to time decay
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should be part of the trader’s plan. It comes with the territory. In this
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example, Mick is willing to accept about three weeks of erosion. Mick
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needs to think about what his put will be worth, not just if the underlying
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rises or falls but also if it doesn’t move at all. At the time the position is |