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June 7, 2004.

• On June 6, 2004, a "put" signal was generated.
   
• On June 7, 2004, a trade was initiated in accordance with the signal issued the day before. We bought QQQQ puts at $1.40 per contract.
   
• On July 1, 2004, the trade was closed in accordance with our signal. We had decided to lower our "Suggested Exit Price" and close out the trade.

  Since the expiration date for our particular option was rapidly approaching, the probability that our contracts would still increase substantially in value had already been significantly reduced - it would have been difficult to even close our position near its original purchase price.

  The chart below illustrates that for this particular trade it did not matter whether you bought puts or calls, nor did did it matter what expiration date you picked. Because the index traded in a tight range, all options buyers trading this time frame lost their premiums.

  Let us take a look at some numbers:
   

  • On June 7, 2004, QQQQGK puts (with a $37 strike and July expiration) cost $1.00. On July 7, 2004, the same option traded at an average price of $0.80 � i.e., a reduction in value of about 20%;
     
  • On June 7, 2004, QQQQTK calls (with a $37 strike and August expiration) cost $1.60. On July 7, 2004, the same option traded at an average price of $1.10 � i.e., a reduction in value of about 30%.
     
  • We sold our QQQQ calls at $0.65 per contract and took a 54% loss.

The time value of our options had decayed to the point where it was better to take a loss rather than wait for a potential turnaround (but risk even higher losses).

It is difficult to trade options when an index moves in a narrow range; in this situation, the time factor � one of the most powerful factors affecting options prices � works heavily against you. You can see from the chart below that since February 2004, the NASDAQ-100 has been trading in a very tight range. Upon closer inspection, you can discern two small down trends and two small up trends, with each �mini trend� lasting more than a month. We call this type of market � where the index moves in a small trading range for a prolonged time - the "options buyers killer". In this a market environment, it really does not really whether you buy puts or calls; if you are not fortunate enough to be buying very close to a (coming) reversal point (and taking your profit rather quickly), �you will lose.

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