Not Buying Enough Time

There’s never enough time to do all the nothing you want.
Bill Watterson, Calvin and Hobbes

How many times have you heard people lament about not having enough time? There is never enough time, except in those long summer days of youth.

Options allow traders to buy enough time and to be successful you must take advantage of this and buy more time. If you buy options, not paying for enough time is a critical mistake you must overcome. Before short term option buyers start flaming me, let me say there are instances when short term option are the right strategy; however, those instances are the exception to the rule.

There are four benefits to paying for more time when trading options.

1. You are actually paying less not more. You are paying less per time unit (day, week, month). The longer the time to expiration, the cheaper options become per time unit. Let’s look at $40 Calls on Akamai (AKAM) to illustrate this. AKAM closed at $38.58. June options set to expire in 24 days have a bid/ask mean of $1.30, July $2.20, Aug $3.05, Nov $4.70, Jan 2010 $8.45. How much are you paying per day?

Expiration	Cost	Days	Per day
June	1.30	24	0.054
July	2.20	52	0.042
August	3.05	80	0.038
November	4.70	178	0.026
Jan 2010	8.45	598	0.014

As this table shows the June Option is really two times more expensive than the November and almost four times more expensive than the LEAP. You are buying time and should want to buy it as cheaply as possible. Don’t be fooled by the lower price.

2. I touched on the reason why you should be paying more for time in Day Two: The Need for Speed and Direction. On average stocks are range bound 70% of the time. By paying for more time you give your trade the opportunity to work. You’re paying time to be your ally, rather than paying a smaller amount and having time as your foe.
3. Options are a wasting asset. The value of these financial instruments decays with time. This decay is fastest in the four to six weeks prior to expiration. By buying more time you are slowing the decay of your asset. All going well you’ll get to take your profit before decay can eat up your profit.
4. By buying more time you increase the responsiveness of out of the money options. Geeks and Greeks call this delta Delta measures the sensitivity of an option’s theoretical value to a change in the price of the underlying asset. Put simply if the underlying goes up and a longer dated option will go up more. To illustrate this and point three let’s look at those Akamai $40 Calls again. First a little more Greek. Time decay is called Theta, the dollar amount that an option will lose each day due to the passage of time.

Expiration	Delta	Theta
June	0.4115	-0.0390
July	0.4630	-0.0274
August	0.4940	-0.0234
November	0.5391	-0.0155
Jan 2010	0.6178	-0.0080

This table shows how the shorter dated options will move less in response to changes to the price of Akamai and will have faster time decay. You don’t want either of those characteristics. You want your options to move more in response to the underlying and decay less. So buy more time.

Conclusion

It may feel like you are putting more money at risk, but in reality you are increasing your odds of success rather than throwing your money away. If you want to be successful buying options then you must buy more time.