From Theory To Practice

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Diet Time Value

From Theory To Practice

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

By selling out-of-the-money options, we are selling options that are 100% time value (or extrinsic value). This is an important biproduct of our philosophy that has significant implications for our profit/loss expectations. Specifically, rather than try and capture all of this extrinsic value, we much prefer a more conservative approach, where we target some fraction of our max profit. Mike, from Everyday Trader, joins the discussion to help us sift through all of this, and he brings up an excellent illustration with a Short Straddle.

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