There’s one more tool in our kit, one that may not seem obvious. It’s enormously powerful, but many traders apparently have some difficulty in using it to their advantage. This tool is time. It’s just sitting there waiting for us to use it, we don’t have to spend a dime to acquire it, and all its power is available to us just for the price of understanding.When we trade options, we can usually put time on our side to one degree or another, and we are utterly negligent if we don’t at least try to claim this trading edge.
Options are famously described as “declining assets” because they lose value over time. Look at any table of striking prices and market prices on the options available in any market and you’ll see one absolutely constant condition. Go ahead, pick up a copy of Investor’s Business Daily any day you like. Or, visit quote.cboe.com for stock option prices or check the futures options’ closing prices each day at bohlish (a remarkably useful, and free, Internet site, by the
way, provided by a very savvy introducing broker named Bernie Bohl) after about 4:15 P.M. Central time.One thing is absolutely plain, every single day. The price of any option,per unit of time remaining in its life, is highest for the shortest-dated and lowest for the longest-dated options. Option premiums also vary directly with their IVs. The general principle of time with regard to options trading is this: when buying options, buy as much time as you can conveniently afford, and prefer buying options with lower IVs to options with higher ones.
When writing options, sell the smallest chunk of time you can manage (consistent with caution and a satisfactory notional return on capital, of course), and prefer writing higher-IV options over lower-IV ones.Please note that, regarding options, this buy-the-long-date, write-theshort-date, buy-the-low-IV, write-the-high-IV advice is nothing new.
One way or another, virtually every book or article ever written has acknowledged these basic principles of options trading. One thing is puzzling, though.How is it that there are still so many traders who willfully misapply these principles in their trading? More curiously yet, there is another sizeable group of traders who, for whatever reason, simply refuse to exploit the advantages that a proper consideration of time would offer them.
I’ve no idea why these camps don’t use time to their advantage, but I’ve a very good idea of how to relieve them of some of their capital as they fail to do so. Don’t emulate these folks in your trading, okay? Get accustomed to enlisting time as your ally to whatever degree possible, all the time.There are numerous Internet sites that offer lots of data about option IVs.
A Google search using +“futures options” +“implied volatilities” as the search key will turn up quite a few very interesting sites (along with, sadly, a lot of brokerage sites which usually require a lot of time and effort to navigate successfully). One particular page on one of these sites is an excellent time saver regarding option IVs. The multifeatured service site, optionetics, publishes a summary page of futures options’ IVs every day.
If I’m in a hurry or away from the office, the Web page platinum optionetics has a nice table of 6-month ranges of IVs for most of the major American futures markets. Within the table, the various markets are ranked from most expensive to least expensive, in terms of the relative level of the options’ IVs within their recent range. Option IV ranges for other lengths of time are presented on related pages at this site.
Additionally, by clicking on a specific market, you can view all the current information about every individual option in that market. Theoretical fair values, option deltas, all the so-called “Greek” figures are all there, right in one spot. Very convenient indeed.If information is the key factor in making trading decisions, then our toolkit must be designed with a view toward facilitating our ability to gather and analyze information, on both an immediate and a long-term basis.
Any tool that advances our efforts here is a worthwhile one, and we should spend some amount of effort to acquire new tools over time, while also improving our current ones when we can. We should distinctly also realize that information is directional. Most information is positive in that it fills a gap in our knowledge, clarifies a situation in a market, or assists our decision-making process in other ways.
Negative information, that which allows us to draw accurate negative inferences about a market, should not be allowed to fall off our radar screen, though. It’s every bit as useful to fade a losing trader,provided we can identify him, as it is to ride the coattails of a successful one.