| | | | And I gotta tell you, it was fun!
But the truth is, those are few and far between. The reality is – as we’ve talked about in the last two reports – the odds are stacked against folks who buy these.
But what if I told you there’s a totally different way to take advantage of them?
In fact, the real edge in short-dated options in my opinion does not come from buying at all. The best way to use these options is to flip the regular way of trading on its head by actually selling them.
Buying Short-Dated Options: High Risk, High Reward
Again, the traditional approach is buying short-dated options for a big directional move. When you’re right, the ROI can be massive. But the win rate tends to be extremely low because of the factors we’ve talked about in previous reports.
Not only do you have to time the trade just right, you also need a big move in the stock for it to work out. It’s a classic high-risk, high-reward game that the data tells us most traders lose handally.
The Power of Selling Short-Dated Options
Here’s where things get interesting—and where most traders miss a massive opportunity. Instead of buying short-dated options and hoping for the perfect move, you can sell them and stack the odds in your favor.
Think about it: when you buy options, you need the market to move fast in your direction. But when you sell short-dated options, time is working for you. If the market stays flat, you win. If it moves slightly against you, you can still win. Even if it moves in your favor but not fast enough, you still win. If it moves a lot in your favor, of course, you win as well.
So in other words, we dramatically shift the scenarios in our favor (check out the table below).
By selling these options using strategies like debit spreads, you can take a directional trade while still taking full advantage of the rapid time decay that eats away at their value. Instead of being on the wrong side of that decay, you’re the one collecting the premium as those options lose value.
Here’s an example of how the scenarios can change using the type of debit spreads I trade in my Overnight Option Strategy |
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