Lifetime Options That Never Expire - Investing Shortcuts

Lifetime Options That Never Expire

By October 26, 2015Investing, Markets, Trading

With the significant market declines in the fall of 2008, many stocks were trading at multi year if not decade lows. The history making volatility made option premiums more expensive in relative terms because of the market uncertainty. Because of this fact, the limited risk attractiveness of purchasing options was offset by the higher costs for that protection.

With a nearly 50% drop in stocks from the highs of October 2007, options had inflated dramatically in price. The demand for puts in a volatile environment forced premiums higher much like flood insurance increases after the destruction to property. While damage had been inflicted, investors could still get protection from further losses by buying options but paying up for it.

At some point, traders will look to participate in a recovery to the upside. Nearly as difficult to determine when that is going to happen is how to take advantage of the situation. Buying calls in an inflated premium environment can work against investors when that volatility subsides and prices move closer to historical norms.

Think of volatility as a balloon. When the risks of large market moves are high, the balloon is fully inflated and options are expensive in relative terms. As the market stabilizes, the air comes out and that volatility component is less of the option price. So if you are an option purchaser is very possible to be correct in choosing market direction but lose overall because of decreasing volatility.

The Standard and Poor’s 500 index is often used by professionals to measure overall investment performance. As a market barometer, this basket of companies comprises over 70% of the total market capitalization of all stocks traded in the United States. The major market correction appeared to some as an opportunity to take advantage of cheaper share prices as the index hit over 10 year lows.

At one time in November 2008, over 115 of the S&P 500 stocks were priced at $10 or less. Risk can be measured strictly in dollars rather than percentages but cheaper stocks have less to fall in comparison to high priced stocks. If an investor is prepared for the worst case scenario of the shares going worthless, inexpensive stocks offer an investment with limited dollar risk.

Well-known names like Citigroup, Etrade, Ford, General Motors, and Starbucks suffered greatly and have traded in the single low digits. These companies could go bankrupt and that stock would be worthless. For some, they are an opportunity to trade a large amount of shares with less money and without any time constraints.
Typically buying options can be way to control a large amount of stock with a smaller dollar investment. In addition, time value is another major component in the option price. Because of a larger window of opportunity for the market to move in your favor, the more time that is purchased will increase the expense of that option.

The passage of time can be costly for those that purchase options. As any trader will acknowledge, timing is the key, but with options it can be everything. Options will have zero value at expiration if they are out of the money.

While it is never good investment advice to buy a stock just because it is cheap, there are opportunities that some traders cannot pass up. The limited risk benefit of an option can be offset by the decaying time value if not precise with entry into the position. For some investors that total potential premium spent can buy shares that will never expire and be profitable if and most importantly whenever the company recovers.

Alan Knuckman

Author Alan Knuckman

Alan Knuckman is the Founder and Chief Market Strategist for www.BullsEyeOption.com a subscription trading service for his inner circle members. He has over 25 years of market experience that began in the pits of the Chicago Board of Trade as a runner and progressed to a Treasury Bond speculator. Each trading day Alan is the video host of the Morning Market Stir from the CME Group and the Pre Market Pulse on CBOEtv. He is also a frequent financial commentator appearing on television regularly with CNBC, CNN, Bloomberg, and Fox Business Network.

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