Am I correct in my thinking that...one should typically buy near the money options that have a pretty distant expiration date? Obviously, if you have a plan....to unload those contracts at a known time(prior to earnings for example) then maybe you wouldnt need to buy something that expires 6mos out.
As you go farther out in time, the premium increases, especially on an option that is near the money (in either direction). Then after you buy it, the premium erodes with time. I'm not saying one should never buy an option with six months or more to expiration. But it has to part of a concrete strategy, and there has to be a concrete reason for choosing that particular expiration. BMK
This is actually one of the few positives of buying options with a longer expiration period: theta is still small and grows very slowly. Once you get to 45 days or so, it starts to accelerate.
Take a look at ORATS and find out for yourself. These type of questions are easily answered thru simulations.
Ive been messing around w/fidelitys P/L simulator. Its been great! Helps me kind of figure out what I should and shouldnt buy. Annoyed I always find out about these things AFTER i make the big financial mistake.
what happens if you buy a call....and it goes up $5, then you sell it? do you get the FULL PREMIUM + GAINS? OR do you get little LESS THAN THE FULL PREMIUM + GAINS? i guess youd get a little less since some time has went by? ...due to time decay as @BMK said above?
I'm no options expert, but I think it means you have $5 more than when you owned the call (minus commissions and bid-ask spread).
The profit calc is similar to a long stock. You get the current market value. If it's higher than the initial premium you paid, then you make a profit, if it's less then you of course make a loss. That simple. Your max loss is limited to the initial premium, the same like with a stock.
Always buy one expiration after the expiration you were planning. For example, if you buy the Mar options, buy the June instead. Yes, more money but often you'll be too optomisitic re time with the March. You were expecting the stock to explode higher before March but it didn't, the move started in late April.