Keep Your Contracts From Burning Up Before Expiration
It’s a process that begins four hours before touchdown with a margin of error that’s life or death.
It includes a sonic boom and countless calculations. At least once, it’s resulted in a catastrophic failure with 100% loss of life.
Such are the stakes for re-entry in NASA’s now retired Space Shuttle. If you’re watching an options contract nearing expiration – you may have a similar feeling. That sense that your trade will either be profitable, or burn up before entry – assuming about a thousand things go right.
If your options batting average is far less than you’d like – there’s one immediate adjustment you can make. Time. That’s right, giving your trade and the contracts attached to it the right amount of time to develop can increase your odds for success. As long as you know what to look for and how to manage your trade.
Why most contracts burn up before expiration
At an altitude of about 80 miles, the space shuttle goes from being a spacecraft to flying more like an aircraft. It’s ‘entry interface’ – the critical point in the mission when either the crew will find themselves on the ground 30 minutes later – or burning up instantly.
Every options trade goes through the same critical phase – yet it’s overlooked by most traders the second they open an options chain. Interested in quick profits based on short-term price action, they choose a timeframe that puts them at a huge disadvantage.
This is simply due to the fact that many traders fail to compare pricing from one timeframe to the next. They choose to go out only a week or two, maybe a month at the most, hoping to limit their exposure in the market. Compounding this costly lack of analysis, they also skip meaningful analysis of their chart.
The second they choose an option under these circumstances – they destine it to burn up before expiration. They also leave many of the easy income plays off the table.
A way to give yourself time to maneuver
The number one objective in early reentry is to burn off speed. The shuttle is going so fast that it has to perform a series of steep turns to slow the craft down. The flight path takes the form of an elongated letter ‘S’. The same flight path can be charted – and then analyzed – with every options trade.
When sizing your options trade, it’s vital that you look at the risk profile and the amount of profit you hope to gain relative to the risk. This shouldn’t happen when you’re confirming your trade. If you’re doing it then, you’re likely sealing its fate.
Thanks to the thinkorswim analyzer, you can simulate multiple trade scenarios and compare their prospective flight paths. Doing this will quickly reveal both the timeframe and chain pricing that’s optimal. More often than not, this exercise will reveal that you need to take a longer timeframe to let your trade unfold if it’s to land safely.
It’s an analysis that takes minutes, if not seconds, to perform.
Putting probability on your side
If you live in Florida, you can hear two sonic claps as the orbiter makes its way home – depending on the flight path. This is because even though it’s gliding, it’s sailing along at the speed of sound. By the time it touches down, it will still be going 225 miles per hour. No wonder someone lets the chutes out.
You can add chutes to your trade simply by giving it more time. Why go screaming into an expiration, essentially betting on the direction of a stock or index, when you can glide? This gives you a chance to manage your position actively – and even exit early if your contracts have reached a high percentage of their profit potential.
Take a look at this trade on the QQQ index. With three weeks to go, it’s basically a 50/50 proposition. Push it out to six weeks, and you’ve put not only the odds in your favor – but you’ve also given yourself room to maneuver.
Touch down with profits safely by managing time to expiration
It’s at TIG-1 hour that mission control gives the ‘go’ for deorbit burn. That’s the official approval to go re-enter the earth’s atmosphere. During reentry, the orbiter is basically a glider with the engines off and Mother Nature at the stick (with a highly qualified Commander).
Stop leaving your trade to chance. Give yourself and your precious contracts the room they need to breathe. If you’ve been trading weekly contracts – back off the gas and push your trade out a month. Enter with reliable support and resistance levels that have been honored by time.
Above all, avoid entering in no-man’s land. If you’re not clear on the exit, or where you’ll find support during ANY timeframe – you’re likely betting on a hunch and shouldn’t be getting in, in the first place.
Adjust your timeframe and land your profits without drama.