Short term stock option trading bobbins
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But odds are you are neglecting the theta cost of those options, and the actual odds that you have on the position. Or flip it around, you could think that since an option has a theta of with 4 days left to expiration, that somehow you'll be able to make 50 bucks a day just by selling those options, without any respect to the gamma risks in selling short term options.
The desire for newer traders to trade short term options is compounded by the fact that weekly options have become much more widespread in many options, so every week can behave like options expiration. We'll dive a little further into option greeks so you can get a better understanding of what risks you take when trading short term.
Gamma is a stock option greek that makes options trading so fun. It can be referred to as the "acceleration" of the option. If you are long gamma, you want fast moves; if you are short gamma, you want the underlying not to move at all. It's also known as the second derivative, which doesn't mean much unless you are viewing a risk graph:. Gamma is a wonderful thing, and it is directly related to the amount of time decay available in an option.
You can consider gamma to be like fire: But if it gets out of control, it can be a very destructive force. What does this tell us? On out of the money options, the gamma will start to decay, as those options lose their effectiveness. But as we approach options expiration, gamma drastically increases on at the money options. This increase is what I affectionately term the "gamma knife edge," and it's where many new option traders get cut. Remember how I said gamma and theta were linked?
Here's a chart of theta over time:. So not only do you have a significant increase in gamma, you also have a much larger amount of time decay in options.