Back on 9/16/19, with the stock at $36, I bought 10 contracts of the DISH 6/19/20 $35 Calls. I paid a premium of $6.30. This was a 9 month option with plenty of time before expiration, but when I bought the option the stock moved down and then moved sidewards for a few months. When this happens Time Decay works against you. What this means is when you’re holding a long option and the stock goes down the premium goes down. The premium is the value of the option. In addition to you losing value because of a lower stock, Time Decay is also eating away at your premium. To have your premium get back to the value you paid the stock needs to bounce back in a big way.
In my case with DISH, the stock moved down then moved sidewards. The premium never recovered to the price I paid. Even with the stock moving higher than it was when I bought the option. This is because the option had less time until expiration and with less time the premium is not worth as much. This is Time Decay at work.
As the stock battled back, moving up slowly, time was passing. About a month ago I started selling some of my contracts in anticipation of my premium not recovering. I was selling 2 contracts at a time. With each sale I took a small loss. I was selling 2 contracts at a time with the hope the stock would move up faster for my remaining contracts. Well, today the stock made a move. The stock actually opened up about $4.50. The problem is I was not near my computer at the open. I got to my computer about 20 minutes after the open. By that time the stock was only up $2.25. Even with the stock up $2.25 the premium was above the $6.30 I paid. I ended up selling my 4 remaining contracts at $6.40. I’m very happy I’m completely out of this position, and out of the last 4 contracts with a small profit.
9/16/19 – Buy to Open 4 DISH 6/19/20 $35.00 C @ $6.30 ($2520)
2/11/20 – Sell to Open 4 DISH 6/19/20 $35.00 C @ $6.40 ($2560)
Profit +40
I’m not happy because of the small profit, I’m happy I didn’t take a complete loss on this position.
The question is, did you learn anything from this trade? Because I did! What you should have learned, and what I continue to learn is, You must understand Time Decay. How the passage of time affects your premium. How Time Decay works against you when buying options. How Time Decay works with you when selling options. How when buying options you need your stock to move up from the time of your purchase.
Keep Studying!
Successful trading,
Steve
The Options Coach