Short-Term Options Arc More Risky

Short-Term Options Arc More Risky

If you buy options, you are better off buying longer time period options—six months, or so. This will minimize the chance your option will run out of time before your stock has had a chance to perform.

Now that I've told you this, what do you think most investors do? They buy shorter-term options, 30 days to 90 days, because these options are cheaper and move faster in both directions, up and down!


The problem with short-term options is that you could be right on your stock but the general market may slip into an intermediate correction, and all stocks will be down at the end of the short time period. You will then lose on all your options because of the general market.
This is also a reason why you want to spread your option buying and option expiration dates over several different months.

I also prefer buying options on the most aggressive and outstanding stocks, ones where the premium you have to pay for the option is higher. Once again, you want options on the best stocks, not the cheapest.

You should also adopt some rule about where you intend to cut and limit your losses. The percentage will naturally have to be more than 8% since options are much more volatile than stocks. If an option fluctuates three times as rapidly as its underlying stock, then perhaps 20% or 25% might be a possible absolute limit. On the profit side, you might consider adopting a rule that you'll take many of your gains when they hit 50% to 75%.


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