- The Jumping Cholla
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- Time is the Most Valuable Commodity
Good Morning!
This is the Jumping Cholla (CHOY-uh). The newsletter that turns options market insights into a fun, easy-to-read email that helps you reduce your chances of getting pricked while trading!
Quote of the day:
"So, you're telling me there's a chance...yeah!!!"
-Lloyd Christmas
That's the spirit, buddy! There's definitely a chance that losing trade you're married to will turn around!
It's not like there are guys out there "who are still looking for a scratch"...25yrs later!!! It just needs more TIME!!
Whoopsies, you're trading options, and that shot clock will win run out on you.
Today, let's think about DTE (days to expiration) why it's so important, how it makes stuff behave, and then give you a taste of one of my favorite degeneracies...the 0DTE option!
Quick Links: Why Options Are Fantastic Tools | Dipping a Toe into Hedging
BANG for Your Buck:
| 1/11/2023 SPX = 3919.25 | Handles of Movement | 1-Day Implied % Move |
|---|---|---|
| BANG (intraday) | 51 | 1.3% |
| BANG (weekly) | 112 | 2.85% |
In the coming week, this section will be beefed up with even more relevant and actionable data such as: weekly bang review, overnight expectations, gap probability analysis, and more! Believe it or not, the market just kinda tells you all this stuff, if you know where to look...
I wanna do a quick recap of yesterday's session. And we'll do a lot more of these to help youz active trader types!
The purple box is the predicted trading range of the market. This was implied via the option's market pre-open (powerful stuff folks!)
Look at our BANG surrogate, the VIX. The poor girl couldn't catch a bid all day, even with that 30 handle break in the AM. i.e VIX never popped over it's start of day level.
After seeing that, with no implied expansion of volatility in the option market...the edge now shifts to the upside.
Even if it kept going down, it only had ~12 more handles of running room unless volatility also started increasing!
Okay so she starts retracing upwards...well where is a logical stopping point? How about to exactly where the option market "set their lines" pre-open...imagine that?!
We don't care about lagging indicators like chart studies, we care about watching the "dealer feedback loop" that supports taking 100s of billions of dollars' worth of bets every day! Read more about Setting the "Fair Market Price"
Time = Value
Nerds like to split an option's price into 2 pieces:
Intrinsic ("it's who you are on the inside that counts")
Extrinsic ("hot broads get to cut the line!")
Extrinsic is all about "perceived value".
No chance you're going home with that chick, but you will still waste time and money on her at the bar!
You are willing to pay for the chance that something will go your way!
So, you spot this señorita early in the night. You give her a few glances (those are usually free). You approach, you buy her drink, you get shooed away (temporarily, you hope), but the night is young, and you still have TIME!
This muchacha is still worth your efforts (i.e. your "perceived shag value"). You go in again.
Maybe it works, maybe it doesn't, but all I know is that you spent time and money on something that had extrinsic potential.
It is much easier for stuff to go your way if you have more time to interact!
This is the same for options. More time equates to more chance that it might go your way, which is why options with more days to expiration must cost more.
And on the flipside, as time comes out, the "time value" of that option must decrease as chances dwindle.
What if it's now 3a and the bar closes at 4?!
Well, well, well, this is about that time when things get ERECT...and I'm talking about option Greeks, ya filthy bastard! It becomes binary real quick.
Now we're getting to the realm of 0DTE options and full-blown degeneracy!
It's 3a; you're a puddle; you got 1 more hour MAX to seal the deal...and of course you're gunna go for it because you believe in sunk-cost fallacy!
What do you do in that last hour?
You definitely don't spend more money and get another drink... that ship has sailed! You throw out one last suave quip and hope the coin toss goes your way!