If you’ve ever bought an option and watched its value melt away day by day, you’ve already met your silent enemy: time decay.
Theta doesn’t care about your hopes, charts, or Reddit threads. It just eats your premium, drip by drip.
That’s why most beginners swear off buying options entirely, claiming, “You always lose if you hold long.”
But here’s the uncomfortable truth: there are times when buying long is not only smart, but the best move on the table. The trick is knowing when.
Why Long Options Feel Like a Trap
Buying options feels seductive: limited downside, unlimited upside. But most traders forget that the meter is always running.
Every day you hold a long call or put, theta quietly drains your account. If the stock doesn’t move fast enough, you’re left holding a lottery ticket that expired worthless.
So should you never buy long? Not exactly.
1. Intra-Week Deep In-the-Money Options: Playing the Fluctuation
When you’re betting on a short-term swing, buying a deep ITM option with almost no time value can work like a leveraged stock play.
Think of it this way:
-
You want stock-like exposure, but with less upfront cash.
-
A deep ITM option (say delta 0.8–0.9) moves nearly dollar-for-dollar with the stock.
-
Because the time premium is almost zero, theta can’t chew away much value.
This isn’t gambling on “maybe.” It’s targeted leverage.
2. Long-Term Deep Out-of-the-Money Options: Insurance, Not Speculation
Now flip the script. What if your goal isn’t short-term profit, but long-term survival?
Annual (LEAPS) deep OTM puts with tiny deltas (0.1 or less) can serve as cheap insurance. Their theta decay is negligible because most of the value is tied to tail-risk events.
You don’t buy these to make money every day—you buy them so that if the market falls off a cliff, you’re covered.
It’s like car insurance: you hate paying the premium until the accident happens.
3. Financing Your Longs: The Art of Paying Yourself Back
Here’s where pros separate from amateurs: they don’t just buy options—they finance them.
That might mean:
-
Selling covered calls to pay for protective puts.
-
Building spreads where you sell one option to cheapen the cost of another.
-
Using volatility differences (short rich, long cheap).
The point is, you don’t let theta run unchecked. You offset it, dilute it, or outright make it work for you.
The Bottom Line: Don’t Buy Hope, Buy Strategy
Most traders lose money buying long options because they treat them like lottery tickets. They forget that every day, the value slips away unless the underlying moves.
The truth is:
-
Buy deep ITM short-term options if you want leveraged stock-like plays without the full cash outlay.
-
Buy deep OTM long-term options if you want protection and peace of mind.
-
Always look for ways to finance your longs so you’re not bleeding premium every single day.
If you’re buying options in any other situation, chances are you’re paying for someone else’s vacation.
No comments:
Post a Comment