3 Trading Horizons Of Options Trading

Have you ever lost money trading stock options?

Chances are good that you tried to apply the 3 trading horizons of stock trading to options trading and then got yourself hurt real bad.

There are 3 time horizons or what we call trading horizons in stock trading and they are; Long Term, Mid Term and Short Term. Long term horizon in stock trading means the buying and holding of stocks for 3 to 5 years, or sometimes longer. This is ideal for value investing in the long term prospects of a company. Mid term investing in stock trading is the buying and holding of stocks for 6 months to a year or two. Most stock investors use a mid term view to invest in new growth stocks which are expected to perform well in the immediate year. Short term investing in stock trading is the buying and holding of stocks for 3 to 6 months. These are stocks of companies that are expected to make a breakthrough in their industries. However, do these notions of investing apply in options trading? Not at all!

The truth is this: Stock Options are derivative instruments that have very short contractual lives! In fact, the longest expiration for exchange traded stock options rarely exceed 1 year! On top of that, the extrinsic value, or what we call time value, built into every stock options contract decays as expiration draws nearer, diminishing the value of your options even if the underlying stock remain stagnant. Due to these characteristics, stock options are trading instruments, not investing instruments, and have much shorter trading horizons than if you trade stocks. This is also why options trading is associated so closely with technical analysis these days because technical analysis is extremely useful in identifying short term trends or reversal of trends.

So, how is the long term, mid term and short term trading horizon defined for options trading?

In Options Trading, long term horizon is the buying of options with expiration of up to 1 year in order to speculate a long term rally or ditch in the underlying stock. Typically, long term charts on monthly time periods are used to identify such trends. Mid term horizon is the buying and holding of monthly options all the way to their expiration, each trade lasting no more than a month. Charts on weekly time periods are particularly useful for identifying mid term trading opportunities. Short term horizon lasts from 3 to 15 days in order to speculate a quick short term surge or ditch in the underlying stock and typically uses short term daily time period charts to identify trading opportunities.

From the above definitions, it is clear that stock options, as a short term trading or hedging instrument, is useless for anyone who is investing in the long term horizon defined for stock trading. Therefore, before you decide to completely replace your stock investing with options trading, first decide if trading stock options allow you to trade the way you always have with stocks. If it doesn’t, it is time for you to either stick with stock investing or learn a trading system which is perfectly suited for options trading.



By Jason Ng


Jason Ng is the Founder and Chief Option Strategist of Masters 'O' Equity Asset Management ( MastersoEquity.com ) and author of OptionTradingPedia.com . He is a fund manager specializing in options trading and his revolutionary Star Trading System has helped thousands.

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What is Google Bombing?

Last April, Stanford University student Adam Mathes played a joke on his friend Andy Pressman. Mathes' goal: Make Pressman's Web site the No. 1 Google search result for "talentless hack." The method: Encourage as many people with Web sites as possible to link to Pressman's site using those words. (Like this: Andy "talentless hack" Pressman.) The prank worked. A year later, Pressman's Web site is still Google's No.1 search result for the phrase. Mathes even invented a name for his joke: "Google Bombing."Before Google, search engines ranked Web pages primarily by examining the content of each page, with decidedly mixed results.

Google improved upon this system by taking into account the links that connect the billions of pages on the World Wide Web. If lots of Web sites link to Slate, for example, Google takes that as a vote of confidence in Slate, and moves Slate higher when it sorts a search for the word "slate." (Click here for Google's explanation of how its search technology works.)

Mathes discovered that the words that site owners use to link to a page affect Google's rankings, too. Pressman's site didn't contain the words "talentless hack," but because so many sites linked to his site using those words, Google figured he must be one. In Google's judgment, a Web page "must be what other people say it is," Mathes wrote. "In a bizarre surreal bow to the power of perception on the web, what you say about a page becomes just as important as the actual content of the page." And because Google's search technology relies so heavily on links, Weblogs (those constantly updated personal Web sites like Kausfiles.com, AndrewSullivan.com, and InstaPundit.com) can have a tremendous impact on Google's search results.

Google searches favor Weblogs because they're sites that contain freshly updated content with lots of links. Conceivably, Weblogs could unleash powerful Google Bombs and threaten the legendary accuracy of the world's favorite search engine. Since Mathes planted that first Google Bomb, the practice has spread throughout the blogging community.

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