Good morning, traders…
Jeff here.
If you think you’re trading the right stocks but you aren’t satisfied with your results … your problems probably boil down to the single most important aspect of options trading.
If you haven’t guessed yet, I’m talking about timing…
The truth is that poor timing can ruin an otherwise promising trade.
You can be 100% right on a trade thesis, but if you enter the position too early (or too late) … you might as well be 100% WRONG.
This effect is even more exaggerated if you’re trading options.
If you’re trading common shares (without leverage), you probably aren’t gonna lose more than 20-30% on your worst day (unless you’re scalping sketchy penny stocks).
But if you’re trading options and the underlying stock moves just a few percentage points in the wrong direction, your contracts could lose more than 50% of their value.
On the other hand, this is why nailing your options timing can be so incredibly profitable…
A few % points in the right direction could earn you a small fortune.
With that in mind, let’s break down everything you need to know about timing your options trades to perfection…
How Timing Can Make (or Break) You
There are several ways in which poor timing can destroy an otherwise excellent trade idea…
Sometimes a setup looks like it’s building into something extraordinary, and then it makes a left turn.
If the play takes one more day than you anticipated to follow through, your entry could be completely ruined.
Other times, you’ll be holding contracts that are deep in the green, trying to determine the most suitable time to sell them.
Picking the right stocks to trade is only half the battle. If your timing is off, it doesn’t matter what charts you’re trading … you’re gonna lose.
And even if your timing is excellent, the market will test your conviction at every turn.
For example, let’s say you’re short a stock (holding puts) and it’s stuck in a bearish channel. Even if the channel holds, there will be some relief rallies on the way down…
If you’re already in the green, you’ll probably be able to hold through the upside. But if you buy your weekly puts on the morning of one of those rallies, you’re putting yourself in a painful position.
This is just one of many examples of why timing is critical for options traders.
You need to read between the lines — and the charts — to find the perfect moment to strike.
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How to Perfect Your Timing
One of the main reasons I love trading options is that they tend to reward perfect timing.
It’s not easy to master, but if you can nail your timing, trading options can be enormously profitable. Let me explain…
If you get skilled at picking the right strikes and expiration dates, you can theoretically make way more money trading options than trading stocks.
A weekly call or put option — bought and sold at the right time — can yield single-day gains unheard of in common-share stock trading.
That said, if you’re not careful, the variety of expiration dates available can lead to poor decisions. Options chains can be overwhelming.
But don’t worry, I’m here to help.
First, let’s think about a few choices you could make to help your timing…
Strike Prices
If you follow my trade alerts, you’ve probably noticed that I never buy contracts too far out of the money (OTM).
If you pick a strike that’s too far OTM, you’re setting yourself up for failure. This is especially true with short-dated options.
Newbie options traders tend to love these higher risk/higher reward trades, but they often lead to failure.
If the position goes in the wrong direction, even briefly, OTM contracts will lose considerably more value than at-the-money (ATM) contracts.
All this to say, pick a strike close to the money. The contracts will cost a bit more, but your chances of success will be much higher.
Expiration Dates
This is the real key to timing options trades — you’ve gotta pick the right expiration date.
If you have a strong conviction that the move will happen soon, you should press your edge and buy weekly options.
For example, my Burn Notice trades on Fridays are usually in contracts with exactly one week of lifespan remaining.
I place the trade on Friday afternoon — with the contracts expiring the following Friday — and sell the position on Monday morning.
But for any trade where you have less than A+ confidence in an immediate move — or the chart is slower-moving — you should buy longer-dated contracts (a few weeks out or more).
Personally, I tend to avoid day trading. My trading style is to buy short-dated contracts that are close to the money and hold them overnight.
But you’ve gotta figure out what works for you.
That said, by simply focusing on your choice of expiration dates, you could potentially improve your entire trading strategy…
Entries and Exits
It’s crucial to have a game plan for when (and how) you’ll enter and exit the trade.
For entries, if you’re thinking about buying puts, consider whether there’s a major support level near the current share price. If there is, you may wanna wait to see the stock lose that level before buying your contracts.
For exits, always have a price target where you plan to exit the trade. And don’t be afraid to set a limit order at your desired exit price.
Additionally, watch the price of contracts throughout the day, noting their high and low points. This will give you an accurate gauge of the range the premiums are trading within.
Be discerning about when you enter and exit your positions … and be very picky about which strike prices and expiration dates you trade.
Happy trading,
Jeff Zananiri
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