{"id":9948,"date":"2011-02-15T11:15:41","date_gmt":"2011-02-15T16:15:41","guid":{"rendered":"http:\/\/www.smbtraining.com\/blog\/?p=9948"},"modified":"2021-05-06T15:18:01","modified_gmt":"2021-05-06T19:18:01","slug":"options-trade-initiation-why-patience-pays-off","status":"publish","type":"post","link":"https:\/\/www.smbtraining.com\/blog\/options-trade-initiation-why-patience-pays-off","title":{"rendered":"Options Trade Initiation:  Why Patience Pays Off"},"content":{"rendered":"<p>When\u00a0\u00a0 developing \u00a0\u00a0traders\u00a0\u00a0enter into \u00a0income options strategies,\u00a0 there is \u00a0\u00a0a \u00a0\u00a0tendency to\u00a0\u00a0become\u00a0\u00a0impatient\u00a0\u00a0when\u00a0\u00a0\u00a0executing the opening trade.\u00a0 \u00a0The \u00a0\u00a0\u00a0trader \u00a0\u00a0will\u00a0\u00a0 typically\u00a0 put\u00a0 an \u00a0order \u00a0in at\u00a0 or around the mid-price but \u00a0often finds that the market \u00a0is \u00a0not \u00a0biting on that \u00a0\u00a0price immediately. \u00a0\u00a0This can create anxiety and a feeling of impatience in the trader,\u00a0\u00a0 arising \u00a0\u00a0from the belief that,\u00a0 \u00a0since \u00a0almost \u00a0\u00a0all income strategies \u00a0are \u00a0\u201ctheta negative\u201d at initiation (i.e. all other things being equal, the passage of\u00a0 time <span style=\"text-decoration: underline;\">improves<\/span> the P and L of \u00a0income \u00a0trades)\u00a0 that we are in a \u00a0hurry \u00a0to get the trade placed to \u201ccatch the theta\u201d.\u00a0\u00a0\u00a0 But \u00a0\u00a0what\u00a0 \u00a0the developing trader often misses is that, in the majority of expiration cycles, the trade will \u00a0\u00a0go\u00a0\u00a0 <span style=\"text-decoration: underline;\">negative<\/span> at the outset of the trade only to turn positive later as time decay picks up. \u00a0\u00a0So a delay in placing the trade until the market \u201ccomes to us\u201d, more often than not works well. Whereas if we negotiate the price too easily, we often find ourselves regretting having negotiated the \u00a0\u00a0price so heavily , when, if we had simply been more patient, we would have gotten our price or even an improvement\u00a0\u00a0upon our original\u00a0 price\u00a0 goal.<\/p>\n<p>Here\u2019s\u00a0\u00a0 a\u00a0\u00a0 simple\u00a0\u00a0 example\u00a0\u00a0 from \u00a0\u00a0a \u00a0\u00a0few\u00a0 \u00a0days\u00a0 \u00a0ago. \u00a0Last \u00a0Wednesday we initiated a 5-lot \u00a0March call side butterfly in \u00a0CAT .\u00a0 The\u00a0 \u00a0market \u00a0\u00a0mid-price for this spread \u00a0\u00a0was\u00a0\u00a0 a \u00a0\u00a0debit \u00a0of \u00a0$2,495.\u00a0 As often is the case, the market was not filling our price at the mid and an impatient trader would have caved and paid a higher debit to get this done.<\/p>\n<p>We took a look at the options \u00a0risk \u00a0analysis software that we use and noted that a \u00a01.30 \u00a0\u00a0point \u00a0<span style=\"text-decoration: underline;\"> upward<\/span> move in the price of CAT, assuming a 1 point drop in implied volatility,\u00a0 \u00a0would\u00a0 \u00a0have \u00a0\u00a0moved\u00a0 \u00a0the \u00a0\u00a0mid-price debit on the trade \u00a0down 2%, or $50. \u00a0If we held our price during a move like that, we certainly would have gotten filled at one point.<\/p>\n<p>By the same token, a \u00a0\u00a01.30\u00a0 \u00a0point\u00a0 \u00a0<span style=\"text-decoration: underline;\">downward<\/span> move in the same stock, assuming a 1 point increase in \u00a0\u00a0implied volatility, would move the debit down $50 \u00a0as well.<\/p>\n<p>It \u00a0\u00a0is \u00a0\u00a0pretty\u00a0\u00a0 reasonable\u00a0\u00a0 to expect\u00a0 CAT,\u00a0\u00a0 a \u00a0$100. \u00a0stock \u00a0\u00a0\u00a0\u00a0to make\u00a0 a\u00a0 1.3 \u00a0point move\u00a0 in either direction over the course of a\u00a0 trading day.\u00a0 And even if it does not, a slightly larger\u00a0 move\u00a0 over\u00a0 2 days\u00a0 would\u00a0 cause\u00a0 the\u00a0 same\u00a0 reduction\u00a0 in\u00a0 debit.\u00a0 As it turns out, and of course this will not always be the case, CAT made a\u00a0 \u00a03.05 point\u00a0\u00a0move\u00a0\u00a0above the original entry price of the trade the very next day \u00a0and the total debit dropped <span style=\"text-decoration: underline;\">15%<\/span> by the end of the next trading day!<\/p>\n<p>Trade initiation is the ideal point in a trade\u00a0 to\u00a0 practice execution\u00a0 patience, because no capital is at risk that point in the trade.\u00a0 Most of the time, with a little bit of patience, we can get at least mid-price and perhaps better.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>When\u00a0\u00a0 developing \u00a0\u00a0traders\u00a0\u00a0enter into \u00a0income options strategies,\u00a0 there is \u00a0\u00a0a \u00a0\u00a0tendency to\u00a0\u00a0become\u00a0\u00a0impatient\u00a0\u00a0when\u00a0\u00a0\u00a0executing the opening trade.\u00a0 \u00a0The \u00a0\u00a0\u00a0trader \u00a0\u00a0will\u00a0\u00a0 typically\u00a0 put\u00a0 an \u00a0order \u00a0in at\u00a0 or around the mid-price but \u00a0often finds that the market \u00a0is \u00a0not \u00a0biting on that \u00a0\u00a0price immediately. \u00a0\u00a0This can create anxiety and a feeling of impatience in the trader,\u00a0\u00a0 arising \u00a0\u00a0from the belief that,\u00a0 \u00a0since \u00a0almost &#8230; <a href=\"https:\/\/www.smbtraining.com\/blog\/options-trade-initiation-why-patience-pays-off\" class=\"more-link\">Read More<\/a><\/p>\n","protected":false},"author":741,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1,1402,1584,1616,455],"tags":[1624,1598,1623,1259],"class_list":["post-9948","post","type-post","status-publish","format-standard","hentry","category-general-comments-2","category-options-education","category-seth-freudbergs-blogs","category-smb-fundamentals","category-trading_psychology","tag-butterflies","tag-options-strategies","tag-options-trade-execution","tag-options-trading","no-post-thumbnail"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v26.1.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>Options Trade Initiation: Why Patience Pays Off | SMB Training<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.smbtraining.com\/blog\/options-trade-initiation-why-patience-pays-off\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Options Trade Initiation: Why Patience Pays Off | SMB Training\" \/>\n<meta property=\"og:description\" content=\"When\u00a0\u00a0 developing \u00a0\u00a0traders\u00a0\u00a0enter into \u00a0income options strategies,\u00a0 there is \u00a0\u00a0a \u00a0\u00a0tendency to\u00a0\u00a0become\u00a0\u00a0impatient\u00a0\u00a0when\u00a0\u00a0\u00a0executing the opening trade.\u00a0 \u00a0The \u00a0\u00a0\u00a0trader \u00a0\u00a0will\u00a0\u00a0 typically\u00a0 put\u00a0 an \u00a0order \u00a0in at\u00a0 or around the mid-price but \u00a0often finds that the market \u00a0is \u00a0not \u00a0biting on that \u00a0\u00a0price immediately. \u00a0\u00a0This can create anxiety and a feeling of impatience in the trader,\u00a0\u00a0 arising \u00a0\u00a0from the belief that,\u00a0 \u00a0since \u00a0almost ... 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