The expression “TIME IS MONEY” is one of the most important concepts in options trading. It is most relevant to those who either own an option or are planning to buy an option.
If you own an option, time is your enemy. You must keep in mind that the time value of your option will diminish, particularly during the last two to three weeks before expiration. If your option is out-of-the-money, you are especially vulnerable to a total loss of investment in the trade. Never hold an out-of-the-money option until the very end with only the faint hope that unforeseen circumstances will cause the stock to move favorably for you. An early exit from a few of these hopeless trades can salvage enough capital to fully finance a new trade. Forget about those rare instances in which the stock did finally move favorably during expiration week, because those highly infrequent payoffs will not offset several trades with a 100 percent loss.
When you are considering an option to buy, make sure that you allow enough time to be proven right in your judgment about the stock. It may be tempting to select that cheap front-month option on a stock that you expect to soon move up, but three to four weeks can pass very quickly. The option with the same strike price that expires two to three months later may seem expensive, but it might be worth paying more to get the extra time to participate in the expected stock movement.