Duration Trumps Direction

Duration is an interesting variable to play around with.

In bonds, the longer the duration, the more risky the bond is (thus the more it pays). In stocks, most people tend to just buy and hold, so duration can either be very good (the stock increases over time) or very bad (the stock decreases over time).

In options, we like to sell premium, which utilizes time decay. However, if we enter a trade too early (a mistake I have made before) we sometimes don’t have enough time to be right.

It’s the worst thing in the world to have your trade expire a few days before the underlying finally starts doing what you wanted it to do originally.

Luckily, we can always roll out our position to a further out duration.

Direction cannot be so easily manipulated, which is why it is easier to simply place a trade in that sweet 45-day zone and watch it over time. If you still believe in the trade, but the market has yet to respond, roll it out. Or, if you’re getting badly burned and see no end in sight, take it off.

Premium is essentially comprised of a decay in theta, which is why duration is so important to option traders! It is also the reason why direction really isn’t all that integral to success. As long as we use time to our advantage, we can be successful.

Disclaimer: These views are not investment advice, and should not be interpreted as such. These views are my own, and do not represent my employer. Trading has risk. Big risk. Make sure that you can balance your risk/reward, and trade small, and trade often.

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