Unlike put options, call options are banking on the price of a security. Security is going to go up in value before the expiration date of the contract. Cap profits), a long vertical spread with a call is a good option strategy.
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Anyone watching tastytrade will eventually realize that we use 45 in almost all our studies. Our research has shown that is the best choice. Still we receive many emails questioning the 45 day “rule.' Tom Preston aka TP, joins the guys to explain why the 45 DTE figure is the inflection point in option models.We are currently experiencing a low. We like to in high IV and highenvironments but we also believe in staying engaged in the market.
Some have asked if we should go out in time to collect more premium. TP points out that if you are choosing strategies based upon then the answer is no.
The 45 day area is an inflection point where the increase in premium for an option with a given probability of profit slows dramatically. TP proves this is true using a series of graphs and slides. Although the price of the option increases the further out you go, the steepness or percentage increase rapidly drops off at 45 DTE.What really would convince any doubters is when TP revealed why the 45 day area is an inflection point. He displayed a formula and then explained that increasing time has the same impact on the normal distribution curve as increasing volatility. The increase in time widens the normal distribution and pushes the strike further out-of-the-money (OTM).
TP further explained how the non-linear impact of time on the normal distribution, probability model, and option pricing creates points where the rates of change of the option premium is lower than the additional risk you take with the extra days. Tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested.
Tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. Tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. Tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors.
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