Give Yourself Enough Time

Time, the one thing we can never get back and that we all wish we had more of. In trading time and timing are both equally important. For a variety of reasons that will be covered in today’s article, time can be your friend or a thorn in your side when trading. It is directly involved in theta decay, chart analysis, and for us at TWC our stop-loss limits. 

What is Theta decay?

Theta refers to the rate of decline in the value of the option as time progresses, think of buying a call that expires the same day vs in 7 days. The same day call will have lost most of its value due to theta, and the 7 day will progressively lose more value each day. The term theta refers to the rate of decline in the value of an option due to the passage of time. Also it is referred to as the time decay of an option, thus an option loses value as time moves closer to it’s expiration or  maturity

Understanding the rate of decline for each option is important, it helps you plan your entry and exit price. The longer you hold an option on a stock that is not moving in any direction but sideways, will end up working against you as each day goes on. 

Time and chart analysis

Every trader has their own way of creating their trend analysis even if the basis of their methods have the same foundations. The main constant for all of us, the time frame on  the candle patterns used, is often the determinant on how strong the potential trend is. A 5 minute candle may have a bearish or bullish pattern forming, but if you are not looking for a quick scalping play, you will want to look at the 15 minute to hour candles for confirmation. Candle patterns that develop over a longer time frame will have a stronger confirmation on which way the stock in question may or may not move. Giving yourself enough time on the option and using the right time on the chart will help create a more effective gameplan. 

For the days that are very choppy but you are looking to scalp, the 5 minute time frame on the chart may be the best option available. If you want to swing your play over a few days, you will want a broader chart view along with more time before the option expires. The goal is to make the time available work in your best interest, by considering how it impacts the variables of the trade you want to make. 

Time and our stop-loss

With the previous points in mind, time plays an important role in when we get in or out of the trade when we set our stop-loss. When trading volatile stocks such as tesla, your stop-loss may be more flexible than when trading SPY if you are willing to take on more risk for that particular security. Although for most option plays that we trade, the stop loss target can be hit but then the price may come back down, so how do we determine when to get out? When the stop-loss is hit, we consider whether or not it closed above or below that price on the 5 minute candles. This usually provides us with a clearer view if we should exit, or if it rejected that price and moved favorably afterwards.

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