You Can Time Travel with Options…Seriously

You Can Time Travel With Options…Seriously!

Let me ask you a question:

If you sell an option, the day before Christmas Eve and buy it back after Christmas do you think you will make a lot of money if the market doesn’t really move?   

Most people think so because it seems that every bad educator has shown people this graph:

A graph of option time decay often used by lazy educators to show how easy it is to make money selling options  (it is not that easy)

It makes it seem like every day options are losing value…

So if the market is closed for two days and options decay every day and I sell an option before its closed, I should bank money right? 

Now we are all busy with travel, family, and Santa, so the market ends up being really quiet usually.

Why wouldn’t I sell the day before Christmas Eve and buy it back after?

It looks like l would collect several days of decay with very little risk.  Meaning there is FREE MONEY the week of Christmas in the way options decay. 

WATCH OUT!

This type of thinking puts a huge smile on the face of the Giant Market Making firms like Goldman Sachs or Citadel.   

Why?

THEY KNOW YOU THINK THIS AND WILL TRADE OFF OF THIS BELIEF. 

Not getting too deep into the mechanics of how options and time decay work, advanced market making firms have ways to make options ‘time travel’.

You THINK it’s Monday, but it is actually Thursday to Citadel.   These means you are selling what you think is “expensive,” when in reality it’s cheap!

We never buy high and sell low.

By the time you get around to collecting your options “Christmas bonus,” Goldman has moved on to the next day and you are none-the-wiser. 

In other words, there is free money from options decay the week of Christmas, but you do not get it.  The market making firms do! 

So, what can you do to get the ‘free money’?  

1.  Sell options earlier. Most holiday premium is gone seven days ahead of time.  Thus, if Christmas is a Wednesday, the ‘day off’ premium has been priced out by the previous Thursday. 

2.  Buy options the day of a holiday.  Play their game by buying low and selling high.  The option holder gets to have their options for WAY cheaper than they normally would in a normal trading week. 

So, you can get ‘free money’ from options…be like the market makers!

The Only Option,

Mark Sebastian

PS:  Want to know how to ‘buy low’  stay tuned to our next post when we discuss when to buy an option.

PPS: My next webinar is next week covering Trading Options Through the Holidays. You can register here

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