Could you explain the proper time to sell options? I read one options adviser, who sells things early despite the fact they have a loss but are still in the money. I think they would recover if given time. Is there a magic formula, given time decay?
Even though many option strategies are based on pricing models, which contain some mind-boggling equations, there is not, as far as I know, any magic involved (though I suppose the occasional ability of options to make money mysteriously disappear right before your eyes suggests some measure of magical power).
So, while there is no definite answer as to the "right" time to sell or close out an existing long option position (and I won't try to interpret another person's advice), understanding how time decay, or theta, is calculated and its effect on an option's price can help make more informed decisions.
Here, courtesy of James Hosker, vice president of Derivative Research at Lehman Brothers, is an equation for the theta of a long put:
While this may be comprehensible to "mathemagicians" such as Hosker, who did his best to explain it, it still makes my eyes glaze over. Just as you don't need to know how to build an engine to drive a car, I'm not so interested in how theta was created as I am in trusting its accuracy, reliability and practical applications to help me arrive at a profitable destination. Like all the other