Trading Timeline (Duration)
The beauty of options trading is that we can pin-point and select the exact timeframe we want to trade. While the additional options (no pun intended) gives us flexibility, it also may create confusion as to which contract month to trade.
In this video, I want to talk about the trading timeline with your options trades because this can sometimes be a little bit confusing for people as you get started.
With options, we know that the beauty of them is that we can target specific points in the future or expiration dates to go with our assumptions for possible moves in the underlying stock.
But it can sometimes be hard to know how far out we go. We have this ability with options to trade at any point in the future, and target that expiration, just when do we use it and when don't we. We're going to go through that in this video.
Although we use the monthly contracts here at Option Alpha for the alerts that we do both for their ease and liquidity, we will occasionally trade weeklies around earnings place, and we’ll talk about that here in a little bit.
But let’s first go to our broker platform on Thinkorswim. I just wanted to just highlight the different contract months here. This is a look here at Google, and you can see that with Google, it's got both the weeklies and the monthly contracts going out into the future.
It’s easy to trade anything you want in Google. You can trade the January contracts which are weekly which expire tomorrow, just one day left. You can go out to February and trade those who have about 43 days, or you can go all the way out to March or even January of 2016, January of 2017.
There are so many different possibilities for different contract months. It’s important as you go through whatever broker platform you have that you just understand how each of the different contracts is laid out.
In our case, we actually can see all of the different weeklies that are here, but I can filter them off if I don't want to see them. I just go under this filter thing here and expiration type, I just want to do just the regular expirations.
You can see now I’ve filtered out the weeklies and sometimes that’s what I like to do when I’m not focusing on earnings trades because then, I can just quickly see what monthly contracts are available.
It just makes a lot easier. And the same thing, you can focus on the weeklies if you want to if you just want to trade the weeklies. Here are some of the guidelines that we have on the trading timeline because this is the question that we get all the time.
“How far out should I make my trades?” We’ve put together some quick guidelines that we use, and you can download some of these resources in a PDF by going to optionalpha.com.
We’ve got full trade guides, when to enter and when to exit, trade size and also some complete trading plans as well. But generally, what we like to do is that when implied volatility is high, we like to trade closer in because we find that the high implied volatility makes option premiums very rich for stocks that are closer in.
We like to make trades about 30 to 45 days out and ideally; we’d like to be somewhere in that range. Anything closer than that and maybe we'll consider how good the trade is.
For low volatility environments when IV is low, we like to extend our trading timeline. This does two things.
One: It gives us more time to be right, so we have more time for the stock to move the direction that we want, but also, it takes advantage of the fact that implied volatility is low and we extend our trading timeline to give us a little bit more time decay value in the options.
Because remember, time decay is always working against us, but the further out we go, we get a lot more value from current time decay that’s baked into the contract. It makes it a smart decision to make that trade-off between implied volatility and time decay by going further out.
We sometimes target 60 to 90 day trades a little bit further out, so these would be your debit spreads or calendars or diagonals, things like that. I know that other people also suggest trading even further out, maybe like 120 days or 140 days out.
Personally, I just think it’s a little bit too far to have a bunch of trades on that far out. Number three: If you’re going to trade earnings and do that strategy around the IV crush that happens after earnings, you might want to come in as short as possible to the weekly contracts.
I say one to seven days because if you’re going to do earnings, you’d like to ideally do the weekly contracts. Those are going to be the juiciest contracts with highest implied volatility.
But if they don't have weekly contracts for the stock you want to trade, then you might do that front most monthly contract, whatever that is and hopefully, it's very close in days, maybe 14 days or less just so that you’re coming really close and trying to take just advantage of that move in earnings after the stock.
Hopefully this video has been helpful talking about trading timelines and when to place trades, how far out. As always, if you have any comments or questions, please add them right below the video in the comment section. Happy trading!
The transcript is not available yet. Please check back soon.