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Make Time Work for You

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When we trade the market there are very few guarantees. However when we trade options there is one thing that is guaranteed. That factor is the passage of time. An option will erode in value in accordance with its theta decay. While we cannot know which direction the stock will go we can accurately predict that 31 days of time erosion will happen in the month of May.

Anytime we sell an option we know that the time erosion is working for us. The opposite is true if we buy, we will be paying the time erosion every day we are in the trade.

Another thing that happens when you have time value working for you is the probability of success goes up. If a stock is a 50-50 bet an out of the money option sale usually will be a higher probability bet. That is why I prefer to sell option premium. I want the time erosion working for me.

Margins are generally fixed by the strike price relative to the stock price. However time erosion is partly a function of how much time is left in the option. If we go too short in the maturity of the option we do not get enough premium to generate a lot of time erosion. If we go too long then the time erodes too slowly. Generally somewhere in the 1 month to 3 month is the best.

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