- Timing a trade incorrectly is the same as being wrong…
- Options trading can shine a spotlight on bad timing (and further emphasize the importance of good timing)…
- The specific contracts you buy can have a huge effect on the timing of your trades…
One of the most difficult aspects of trading is timing.
You can be 100% right on a trade thesis, but if you enter the position too early (or too late) … you might as well be 100% WRONG!
This effect is even more exaggerated if you’re trading options. If the stock moves just a few percentage points in the wrong direction, your contracts could lose 30%–50% of their value.
With that in mind, let’s go over what you should and shouldn’t do when looking to time your trades perfectly…
There are several ways in which poor timing can destroy an otherwise excellent trade idea…
Sometimes a setup looks like it’s building into something extraordinary, then it pauses. If the play takes one more day than you anticipated to follow through, your entry could be completely ruined.
Other times, you’ll experience fakeout counter-moves before the setup you envisioned plays out.
Let’s say you’re short a stock, and it’s stuck in a bearish channel. Even if the channel holds, you can bet your bottom dollar that there will be some relief rallies on the way down.
It sure would be a shame to buy your puts on the morning of one of those rallies…
This is why timing is critical for traders. You need to read between the lines — and the charts — to find the perfect moment to strike.
How to Use Options to Your Advantage
One reason I love trading options so much is their ability to maximize the timing of my trades.
If you get skilled at picking the right strikes and expiration dates, you can theoretically make WAY more money trading options than trading stocks.
That being said, the variety of expiration dates available to options traders can lead to some poor decisions from newbies. It’s a double-edged sword.
Luckily, I’m here to help. Let’s think about a few choices you could make to help your timing:
If you pick a strike that’s too far out of the money (OTM), you’re setting yourself up for failure. This is especially true with short-dated options. (More on that in a minute.)
Newbie options traders love OTM options. Higher risk/higher reward trades tend to appeal to people who haven’t been put through the wringer yet.
Don’t be one of these traders. Instead, pick a strike closer to the money. It will cost a bit more, but your chances of success will be WAY higher.
This is the real key to timing options trades — you MUST pick the correct expiration date.
If you have a strong conviction that the move will happen SOON, you should press your edge and buy weekly options.
But for any trade where you have less than A+ confidence in an immediate move, you should buy longer-dated contracts (one month out or more).
By simply focusing on these crucial timing considerations, you could potentially improve your entire trading strategy…
Many traders say they understand the importance of timing, but I see some students making some typical mistakes.
(Don’t beat yourself up, I still make these mistakes myself from time to time…)
Be very careful when you enter a position. And if you’re trading options — be picky about which strike prices and expiration dates you trade.