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Re: Fossil-Fuel post# 2732

Friday, 10/26/2012 2:55:59 PM

Friday, October 26, 2012 2:55:59 PM

Post# of 2846
Currently, QQQ is at $65.31. I am not sure what it was when you bought it, but let me show you why that was not a good entry in general...

You bought an OTM Weekly Call. What does QQQ have to be at just to breakeven on your position?

Answer - it has to be at $66.31 by expiration next Friday. The security has to go up ~1.5% next week to breakeven. Does that sound like good odds? You bought an OTM weekly option. It is all "time value" that you purchased. You have no intrinsic value to the option. The entire purchasing price is subject to erosion based on an accelerating theta. Options' premiums erode quicker and quicker as it approaches expiration. No option expires any quicker than a weekly option.

If the market doesn't move and stays under $65.60, you lose 100%. If it goes down (50% probability based on chance) you lose 100%. If it goes up 1.5% in 1 week, you break even. It would have to go up near 3% next week to make 100%.

Never, never, never buy an OTM weekly option.

If anything, sell it.

If you really want to go long on options, time is against you, so you need to enter a position that has the lowest time erosion as possible. And, the deeper ITM you get, the less premium you have to pay, yet still can leverage your capital.



Si vis pacem, para bellum — If you want peace, prepare for war.

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