Info

25 7/8

-2 7/8

2,204

underlying security and are only interested in what will occur on a particular trading day. These individuals are referred to as day traders. Position traders and day traders have two very different approaches and attitudes when selecting the appropriate option contract to trade. Most position traders typically choose an expiration month and a strike price that matches their price target and the time frame in which they believe that target will be reached. Day traders, on the other hand, are not concerned with which expiration month or strike price they should choose, all they are concerned with is being on the right side of the market in the option that will bring them the greatest return.

When day trading options, various time and price considerations are not as important as they would be to a long-term option trader. Since option positions are held for such a short period of time, the impact of time decay is negligible when day trading and does not really work for or against the trader (unless it is the day of option expiration or one or two trading days before expiration, where time premium typically erodes more rapidly). Although our opinion is by no means absolute, we suggest that when one wishes to day trade options or intends to hold an option position for no more than one to two trading days, that one trade the nearby (closest expiration month) option contract which is at- or slightly in-the-money, when the underlying security has, or is just about to, exceed the exercise price. As we discussed earlier, as the price of the underlying security trades through the exercise price and proceeds to move in-the-money, the time value initially contracts and then begins to move almost one for one in lockstep with the price of the

FIGURE 3.3 Sample futures option price listing much like the one you would find in your local newspaper.

INTEREST RATE T-BONDS (CBT) $100,000; points and 64ths of 100%

Strike

Calls-Settle

Puts-Settle

Price

Feb

Mar

Jun

Feb

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Jun

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