Have you ever heard this term before? If you haven't I am sure today is a great day to hear it since I imagine plenty of you out there are debating this very topic. I can't recall the number of times I had done this as I was first starting out. I get into an option trade, everything looks good, feels good, tastes good, etc. then a day like today comes across and really hammers the option premium. As you look at the new (much cheaper) option premium, you start rationalizing holding this option since you've already taken a beating, you think it would be acceptable to roll the dice with what little premium you have left to give this loss more rope in hopes that the stock comes back.

Wrong.

Did you know that the great and powerful Oz that hides behind the curtain on Wall Street has ways of hearing these thoughts? And when he hears you say this, he makes you pay. He sucks up your trading capital faster than you can continue to hand it out. This creates unreasonable losses. Can't have those.

This is why I prefer not to buy lots of time until expiration. Naturally we have a tendency to wishfully think. Instead of intuitively being able to maximize profits, we intuitively try to maximize the chance of profits. One of the worst things I hear new traders say to me when debating on whether to take a loss or not I always hear..."Well....I have until ______(Insert your month of expiration)." Try to refrain from using an expiration date as an excuse to let losses run. This is why I usually bad mouth Leaps and longer dated options.

When you are getting ready to take a trade and you are selecting an expiration date...ask yourself if you really plan on being in the trade for that long. Make sure the expiration date you select is cohesive with your trading style and chart analysis.

That's all folks...

Posted by Option Addict on 1/18/2007 at 1:12 PM | Permalink