I’m just like you. Well, not exactly like you. But I’ve been there before.
Show of hands, how many of us buy an option contract, have the stock do EXACTLY what we wanted, and still lose?
Your school never taught you. Your grandparents never passed down the family secrets. No book told you this is the way to do it.
It crushes your soul to get so close to an effective trading system, only to have one piece out of place.
Through a lot of trial and error, I learned the hard way that picking the right option contract drew the line between profits and losses.
When people first join the Daily Profit Machine, they see the trades I put out. They see testimonials like these and think, “that’s just too easy.”
It’s a snap to follow a system and make profits. After a while, you start to ask; why does this work this way?
One of the most common questions I get – how do you pick the right option contract?
Have you ever noticed that options get cheaper the closer they get to expiration? You’re not imagining things.
Option contracts act like insurance. When an insurance company sells you a policy, they take a lot more risk when they hold it open longer.
Why is that? The more time you allow for insurance to payout, the greater the odds it will.
Buying a put or call option is like buying an insurance policy. When it exceeds the strike price, you get paid out.
This graph shows you what happens to an option’s price as we get closer to expiration for options that do not exceed the strike price (known as out-of-the-money):
As you get closer to the expiration date, even by the hour, the part of the option price driven by time declines.
When you get to expiration, the value of an option contract time component is $0.
So you can impress your friends at dinner parties – this is the famous Greek known as Theta
Why don’t we trade same day expirations?
Picture what happens with an option contract on the day of expiration. You are now working with this tiny end of the curve.
If the stock price doesn’t exceed the strike price quickly, you may be out of luck.
That’s why we play further up the curve.
But don’t go too far!
When you go too far from expiration, the option price doesn’t change much with the stock.
The closer you get to expiration, the better an option moves 1 for 1 to a price move.
I know it sucks. That’s the tradeoff here. Go too far, and you lose bang for the buck. Cut it too close, and you risk losing the trade.
The Sweet Spot
If you thought I found this out overnight…I’ve got an ocean in the Sahara to sell you. Finding the right balance of time decay and price change took trial and error…and way too much math.
So here’s the secret
Figure out how much time it will take for the trade to play out. Then give it 2x-3x that amount of time.
How would this work with Daily Profit Machine? Simple. We’re working with day trades. While we want to be in and out in a matter of hours, it could last all day.
So, we look out about 3-5 trading days. That takes us into the next week. This sweet spot gives us a great balance of time decay and price change.
But here’s one other pro tip: Look for liquidity!
Liquidity just means finding options that have a lot of volume. The more volume, the tighter the spreads. The tighter the spreads, the more we make, and the less the brokers keep.
It’s easier than you think
You may think this is difficult. It does look intimidating. That’s why I created Daily Profit Machine. Working on your own gives you no reference point. The trial and error starts and stops with you.
I wanted to make things simple. Traders come in with no experience trading options. They quickly learn how to trade options for quick profits.
It’s so simple, you can do this while you’re on vacation.
We all work long hours. Everyone wants to get the most value for their time.
That’s why I set up a free live webinar on Tuesday at 8 p.m. I’ll be going over what exactly I do every day to come up with SPY trades.