Happy Friday, Evolvers!
I hope you all took some money out of the market this week. I know I did…
My recent killer (albeit lucky) trade on Carvana Inc. (NYSE: CVNA) has helped ease the pain from my previous losses…
This is the power of options trading. I never would’ve bagged those profits trading common shares (but more on that later)…
In today’s Q&A, I’ll answer a question that explains one reason (among many) why options trading can be so incredibly profitable when executed with discipline.
Keep reading and I’ll show you…
“What is your research process? How do you find such solid setups, like NKLA?”
When searching the market for setups, I generally stick to my watchlist. This prevents me from getting overwhelmed looking at thousands of tickers at once.
My watchlist is always focused on optionable stocks in hot sectors. Then, I review the list each morning to see which names are volatile, big % gainers that day.
I also ask myself the following questions:
- Are any key price levels about to get taken out?
- Is the trading volume increasing with the share price?
- What immediate catalysts could cause a bigger move?
- At what price would I like to enter (and exit) in the event that I put the trade on?
The truth is, there are only a few stocks that meet my strategy’s criteria at any one given time. (See CVNA, NVDA, and META for current examples of charts that check my boxes.)
I don’t use any sort of scanner and I’m not searching all day long for new setups.
I simply wait for big runners in hot sectors. I’m patient…
Then, I either trade calls on the way up or wait for clear topping signals as an indicator to buy puts and ride the downside…
And if you wanna learn everything there is to know about my trading strategy, check out my ebook — The Ultimate Options Trading Blueprint for Small Accounts.
“I’m having trouble understanding time premium in options. Does it change as the option matures? Why are some contracts so much more expensive than others?”
The concept of time premium in options can be overwhelming at first … but don’t get discouraged. I’m here to help.
Let me illustrate an example…
Imagine you want to buy a toy for your kid, but you think its price might go up in the future.
So, you purchase a special ticket that lets you buy the toy at today’s price, even if the price goes up later.
But because you have this special ticket, you pay a little extra for it, just in case the price of the toy goes up a lot before the ticket expires.
The time premium for stock options is exactly like this imaginary ticket. You pay an extra amount for having the option to buy or sell the stock at a set price in the future.
It’s the cost of having the option available for a specific amount of time before it goes away.
In practice, it works like this…
Let’s say you have two options with the same strike price and the same underlying stock … but one option has a longer time left until its expiration date, while the other option is about to expire soon.
The option with more time left will have a higher time premium because it offers the buyer more time to potentially profit from price movements in the underlying stock.
Keep in mind that time premium is affected by a variety of factors, and it can change over time.
As the expiration date gets closer, the time premium of an option will decrease because there is less time for the stock price to make significant movements.
Other factors that can influence time premium include changes in market volatility, interest rates, and the overall demand for the option.
And this is why options trading (especially on volatile underlying stocks) can be so enormously profitable when executed correctly.
Have a great weekend, Evolvers!
There are a lot of wildly volatile trading opportunities in this market.
Stay disciplined, stick with your ideal setups, and always trade your plan!