Whenever I, or one of my siblings, disobeyed our parent's warnings or rules, they would often tell us, "Those that do not hear, feel." To this day, it still comes to mind when I find myself feeling the effects of going against some sort of warning or rule. Friday was one of those days.

While reviewing my last few trades, I have come to realize that I have been going against one of the rules I learned in my options training. That rule would be "Buy Long, Sell Short." Usually this has a figurative meaning in regards to stocks. Let me explain.

To "Buy Long" means you are buying shares of an actual stock with the intent of holding on to it for a 'long' period of time, because you believe it will go up in price. After it has gone up in price you will sell it and pocket the profit. This is how most people understand how to make money in the stock market.

To "Sell Short" means you are selling the shares of a stock that actually belong to the brokerage house for a 'short' period of time, because you believe the price will go down. After it has gone down in price, you will buy back the same number of shares with some of the money that you received for selling them and the brokerage house will have their shares back at no cost to them and a little commission from you. You, however, get to pocket the difference and whatever interest you gained while holding the cash in your brokerage account. The number of people that understand how to make money this way is not so great, and the number that actually succeed at it is even less.

But when it comes to options, to "Buy Long, Sell Short" has a slightly more literal meaning. The meaning has to do with the amount of time that is available until expiration when the in ITM (In-The-Money) options are assigned, and the rest just expire as worthless.

To "Buy Long" means to buy the option with multiple months until expiration. The benefit of this is that the value generally moves in smaller percentages than shorter term options. This allows more time to average out anomalous price movements that go contrary to technical signals. Price movements like the ones that stopped me out recently. (Friday, September 25, 2009 You Win Some, You Lose Some). This is something that I should of remembered back when I made earlier posts. (Thursday, September 10, 2009 Investor's Personal Portfolio Update and Wednesday, July 8, 2009 Back Again, Finally) The negative is that it costs more to get into the position.

To "Sell Short" means to sell the option with the fewest months until expiration. This is something I refereed to in the post I made Wednesday, September 16, 2009 Position Update. The benefit here is that the sooner the stock expires worthless, the sooner you get to sell another one. The negative is that the amount you get to sell it for is not as great as for longer ones. But then again, you don't have as long to wait to see what happens.

I now fully understand the benefit of following this rule and I will try to remember it for my benefit from now on. I hope what I wrote here helps someone else, also. That is my opinion, you can take it or leave it.

Disclaimer: See bottom of page.