Why do options still lose money despite looking at the other direction?

Why do options still lose money despite looking at the other direction? Because you only win a third of the battlefield. Have a good weekend, everyone. Many people’s experience of buying options for the first time is this: the direction judgment is completely correct, the stock really goes up, but the options lose money. Then I started to doubt life.

The reason is simple - options are not stocks, they are a three-dimensional trading system. Direction is only one of the dimensions, the other two dimensions are called time and volatility. The money earned from the direction may be completely eaten up by time loss and volatility drop, or even not enough.

Only by understanding these three dimensions can we truly get started with options.

First dimension: direction (Delta)

This is the only dimension most people focus on. If the stock goes up, call options make money; if the stock goes down, put options make money. The logic is fine, but the money earned from direction alone is often not enough to cover the losses in the other two dimensions.

Second dimension: time (Theta)

Options are expendable assets. With each passing day, the time value of an option is lost, and the loss becomes faster the closer it gets to expiration. This is why when you buy options, the stock just goes sideways without falling, but the options are slowly shrinking. Time is the buyer's enemy and the seller's friend.

As a buyer, how do you combat the loss of time?

Two ideas: first, if you are very sure about the near-term direction, buy near-month options, the time value is cheap and the leverage is high; second, if the direction is certain but the time is uncertain, choose options in remote months to give yourself more time windows.

But the core solution is: when buying options, you need to capture continuous and smooth market conditions, and you can't buy them and wait. Sideways fluctuations are the graveyard for option buyers, and your premium will be exhausted little by little over time. The

third dimension: volatility (Vega)

This is the most easily overlooked dimension and the easiest one to lose money on. Volatility has four movement states: hovering low, rising hesitantly, rising instantly, and falling with shock.

Many people think that it is more cost-effective to buy options when volatility is low, but volatility can linger at low levels for a long time, slowly draining your premium. The best time to buy options is when volatility starts to move higher, not when it is already high or low.

Volatility has the characteristics of mean reversion, but the regression path is extremely difficult to judge. There is a typical counterexample: after a big drop or a big rise, the market shows a stabilizing signal. At this time, the volatility is at a relatively high point, and buying options requires paying a very high premium.

In this case, it is better to buy stocks or futures directly. The real solution: double click on delta and vega As an option buyer, time loss is unavoidable. You must make money in the volatility dimension while moving in the right direction. This is called the double click of Delta and Vega. What kind of market can achieve double click?

It is a continuous and smooth market. When the price fluctuates horizontally with compression and convergence, once it chooses a direction to break through, the trend is often continuous and rapid. This kind of market direction dimension makes money. At the same time, when the market accelerates, the volatility surges rapidly, and vega is also making money.

Therefore, the most important thing when buying options is to identify this kind of market, rather than worrying about whether the volatility is high or low at the moment. If you really find this opportunity, what does it matter if the volatility is higher or lower at this moment?

For those who are not sure of capturing the continuous market, it is recommended to use the spread strategy instead of single-leg buying.

By buying and selling options with different exercise prices at the same time, the bid spread can significantly reduce time and volatility losses and improve the winning rate, at the cost of sealing the upper limit of profits at the same time.

Since the buyer has to fight against losses in both time and volatility dimensions at the same time, ordinary investors actually have a more labor-saving way - to stand on the seller's side. Sellers naturally harvest time value, and falling volatility is also good for sellers. Of course, sellers are not without risks.

The key is to choose the right target and strategy. The following two strategies are recognized as the most suitable options play for value investors. After the theory, let’s talk about the two smartest option strategies in practice.

If you feel that buying options is too difficult to control, the sell-side strategy is actually more suitable for ordinary investors. Buffett once sold Put to buy Coca-Cola at a low price.

Strategy 1: Cash Secured Put (CSP Cash Secured Put) You want to buy a stock, but you think the current price is too expensive, and you want to wait until it drops a little. Instead of waiting, sell a Put option at a price you are willing to buy. For example: Apple is currently priced at US$150, and you think it is worth buying it at US$140.

You sell a Put with an exercise price of 140 and expires next month, receive a premium of US$200, and freeze US$14,000 in cash.

There are two results: if the stock price does not fall to 140, the option is invalid, and you earn $200 in premium; if the stock price falls to 135, you passively buy it for $140, but minus the $2 premium, the actual cost is $138, which is cheaper than buying at the direct market price.

The core of CSP is: you can earn royalties by not buying stocks, but you can also reduce costs by buying stocks. Both results are acceptable. Strategy 2: Covered Call (CC covered call option) You already own a stock, you don’t think it will rise significantly in the near future, and you want to make some extra money.

For example: You hold 100 shares of Tesla with a cost of US$200 and a current price of US$200. You think it will be difficult to rise above US$220 in the near future. You sell the call with a strike price of 220 and receive a premium of $500. There are two results: the stock price does not rise above 220, the option is invalid, and you make $500 in vain.

You will continue to sell it next month and continue to collect rent; the stock price soars to 250, and you sell it at 220, making less than 220 to 250, but you have already made a profit of $20 difference in stock price plus a $5 premium, and you earn $25 per share, which is not a loss.

Connecting these two strategies is the Wheel Strategy: sell CSP and wait to buy → sell CC after being forced to buy to collect rent → sell the stock after exercise → return to cash → continue to sell CSP. In a volatile city, this strategy is very friendly. Finally, let’s talk about a few pitfalls that can easily make newbies lose money.

First, stock selection is the core, and options are just tools. Don't sell junk stocks for high premiums. Junk stocks may never rise again after plummeting, and that little premium can't make up for it at all. We trade options to acquire stock, not just to collect premium.

Second, you should sell options when the implied volatility is high, such as before earnings reports or when the market panics and plummets. At this time, the premium is expensive and the seller takes advantage. Selling options when the market is calm and the IV is extremely low is not cost-effective in terms of risk-reward ratio.

Third, don’t choose Delta too aggressively. It is recommended to choose options with a Delta of 0.2 to 0.3. There is about a 70-80% probability that the option will be invalidated and you will definitely earn the premium. Putting at-the-money options has a higher premium, but the probability of being exercised increases significantly.

Fourth, if the stock price falls below the CSP exercise price but you don't want to take over, you can choose to roll - buy back the current losing options and sell options with a lower exercise price next month, exchanging time for space. But this only delays the judgment. If there is really a problem with the fundamentals, the loss should be stopped.

Summary: Options are essentially three-dimensional trading: direction is just the ticket, and time (Theta) and volatility (Vega) are the real battlefields.

Buyers should focus on identifying continuous and smooth breakthroughs and strive to achieve double clicks of Delta and Vega; if they are not sure, use spread strategies to control time and volatility losses.

Sellers should take action when implied volatility is high, choose high-quality targets with solid fundamentals, implement CSP and CC steadily, and let time be their friend. Whether a buyer or a seller, patience is the biggest threshold - it determines whether you will ultimately harvest time value or be harvested by time value.

I hope this article was helpful, but as I always say, self-due diligence is important!