CL tags $98.56 AH. Article below on option time decay over the long weekend - nothing you already don't know. I sold my $80s for $0.90. I will be honest and say I regret it in the face of $100 CL. Still if I have to buy them back for $5.00 later in December to sell the Jan for $1 more and hand Uncle Sam the loss from $0.90 to $5, I will consider it an early visit from Santa.
This market business is not for manic depressives - you get resonant coupling. A month ago I was upset because my CNQs had run far into the money. Then I felt smart because it tanked. Late last week I felt a fool for not closing the position to save on some taxes this year. For a $30 gain (about 37%) for my CNQ holdings one pays a roughly $10 ST capital gains tax. Instead, I watched the thing drop $10 in market value.
I won't cry if those puppies get called away at $80. I have said that before.
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Stay Away From Time Decay
IF YOU LOOK AROUND THE POKER table and can't figure out who the fool is, it's probably you. The same principle applies to options trading, especially around the holidays.
If you look around the market and think hoards of options contracts seem to be priced extremely low, you're right. But you're also wrong as you've stumbled into one of the great trading traps of the options market.
Market makers regularly lower options prices ahead of holidays and long weekends in the hope that some investors will buy the contracts, thereby taking on the so-called time decay that would otherwise cost market makers lots of money. When the holiday is over, the prices of the options tend to be readjusted to a higher price.
Options, unlike stocks, are what are known as "wasting assets." This fancy phrase means that options lose a little bit of value as each day approaches toward the contract's expiration date.
Market makers know this, of course, and try to get someone else to pass off the time decay to someone else. For most investors, time decay of options is not a super big deal, but for larger traders such as market makers and others who have to maintain many sizable options positions, time decay can cost them hundreds of thousands of dollars over a long weekend.
The natural question is how investors can make money if they know this is how the market makers will price options before a long weekend. (The options market is closed Thursday for Thanksgiving and reopens for a half day of trading on Friday.) The answer: not very easily to not at all.
If anything, time decay is one reason why so many investors, individual and institutional, like to sell options. They would rather keep the time decay firmly in the court of market makers. Of course, selling options ahead of long weekends, or holidays, seems to make intuitive sense, but be careful because prices have a way of changing when the market reopens. |
