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What happens in the last days?

Options Trading

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A really useful guideline for beginners

Options books teach beginners - quite rightly, I note - that when buying options, they should no longer hold onto the option in the last 30 days, they should get out of it.

The main reason for this is that options devalue in the last 30 days the fastest. Let's face it, this is a really useful guideline for beginners. The last 30 days are here, get out. If you buy, there should be min. 60-90 days in it. This is the basic principle.

Let's suppose we are no longer beginners and dare to jump into buying before maturity. Here, the risk can also be quite extreme, however, the profit is not bad either :)

The following screenshots were taken during the last week of October maturity. Let's look at these, and see what can we learn from them.

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SPY 2 days before October expiration

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What do we see on the chart?

The main options fields that I use are displayed and at the very beginning you can see the "% Change" field.

This indicates how much a given option changed on any given day. As you can see, the price of SPY was 109.31 at the time of the test. The increase of the 109 ATM call was 209% that day.

As we get closer to the OTM direction, the increase is bigger. In other words, for example, the 113 Call option increased 600% in one day!!! Quite nice, isn't it? Although the movement of the underlying product was not big, the 1.7% is an average level in case of the SPY. You can see in the October maturity, that there were two days remaining. As we get closer to the ITM direction, the % change decreases. The 106 has "only" increased 84%. Of course, this is not bad either...

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A significant difference

Now let's look at the November maturity. Compare the change of these options. You can see that the 113 moved 72%, while the 106 only 33%, and the 109 only 46%.

What causes the difference ? The time value, of course! 

Compared:Strike (Call) % October % November

106 84% 33%

109 209% 46%

113 600% 7%

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Another example: CNO increased 30% within a

day

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The last 30 days are risky, but very profitable

The same principle can be observed here. The increase of the October 6 ATM option was 1.000% within a day. Wow, 1.000% - not weak :).

The same increased "only" 216% in November. The reason, of course, can be found in the time value here as well.

You must also see that if the desired move does not happen, the loss can be huge. In my next article, I will show you what happens to the options in the last days, if there is no significant move.

The last 30 days are risky, but very profitable.

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Feel free to ask me!

Email: gery@optionsrules.comMy webpage: http://www.optionsrules.com/

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