A matter of timing

  • TSN tested recent consolidation lows on Thursday
  • Range was preceded by 35% decline from April highs
  • Short-term options traders need to account for time decay

A day after appearing on the LiveAction scan for highest put–call ratios, Tyson Foods (TSN) sold off on Thursday—just about as much as the S&P 500 (SPX), which was experiencing one of its biggest down days of the past couple of months.

On the other hand, while the SPX was still up more than 8% from its October lows yesterday morning, TSN was slightly below them—testing the lower boundary of the consolidation that formed after the stock fell 35% from its April highs:

Chart 1: Tyson Foods (TSN), 12/30/21–12/15/22. Tyson Foods (TSN) price chart. Testing consolidation lows.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

In theory, any well-defined resistance or support level is likely to attract traders looking for a potential breakout or breakdown. On the other side of the market will be traders anticipating the level will deflect prices once again. One group will (eventually) be wrong, and the scramble that occurs when they’re forced to exit their positions may fuel a short-term price burst.

Regardless of when, or if, such a move occurs, there are a few realities traders—especially options traders—need to factor into their strategies. The most important one is time. While stock traders can simply go long or short and wait, traders who buy options must be careful to avoid contracts that may minimize potential profits—or result in losses—despite correctly forecasting a price move.

All options lose value over time, and that time decay accelerates as expiration approaches. The following chart of the TSN December $62.50 put (expiring a week from tomorrow) highlights two episodes:

Chart 2: TSN Dec. $62.50 put, 11/15/22–12/15/22. Tyson Foods (TSN) options price chart. Put lost value despite recent stock decline.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)

In the first (November 15–25), the put’s price declined as TSN shares rallied nearly 5%—as one would expect. In the second episode (November 30–December 15), the put was again lower (as of mid-morning on Thursday)—even though TSN shares fell nearly 5% during this period, and the option went from being nearly $4 out of the money to being nearly in the money.

Time obviously isn’t the only factor affecting an options price, but it can’t be ignored—and it becomes increasingly important toward the end of an option’s life. Traders faced with the uncertainty of when something may happen in a market should remember that long option positions don’t provide the luxury of waiting indefinitely for a price move to develop.

Today’s numbers include (all times ET): S&P Global Manufacturing and Services flash PMIs (9:45 a.m.), quarterly (“Quadruple Witching”) expiration.

Today’s earnings include: Darden Restaurants (DRI), Winnebago (WGO).


Click here to log on to your account or learn more about E*TRADE's trading platforms, or follow the Company on Twitter, @ETRADE, for useful trading and investing insights.

What to read next...

As healthcare stock extends its year-long trading range, options volatility signals it expects a big price move.

Apparel retailer’s options show why what happens after earnings can be just as interesting as what happens before.

Stocks pull back as traders await final Fed meeting—and CPI report—of the year.

Looking to expand your financial knowledge?