Art of Trading Weekly Options
Man first heard about the term ‘weekly options’ in early 2010. Now, the popularity of the weekly option is increasing. If you are wondering what options are and why should you be buying them then you must be new to the concept. Weekly options are actually considered great for those traders of income options opting to have steady time decay. Let us to take for example the options strategy of the covered call writing. Covered call writing means that you are selling a call alongside your stock position. Normally, you would so this once a month as there is a fresh new monthly option series is launched. But with the weekly options, you can now do this every week. You can actually double your income when you opt for weekly options.
A new set weekly option is introduced every Thursday which will then expire on the Friday of the following week. Because of this scheme, you can easily expand your choices in option trading. At this moment, weekly options are seen on popular indexes, ETFs as well as on liquid stocks.
However, weekly options or ‘weeklys’ actually have a higher gamma risk. This high gamma risk is due to the fact that they have shorter expiration period. Shorter expiration periods will make it susceptible to moves which can happen in the underlying stock most especially when the trading closes to the money strike prices. Another thing that you should note when weekly options are concerned is the much lower premiums as compared to the monthly options. This is due to the fact that the quickly expire and they have lower unpredictability risk when compared to the monthly options.
With weekly options, you have to evaluate your strategies carefully and differently in contrast to your strategy evaluation with monthly options because shorter expiration period will mean that you can only find respectable premium selling close to the money options. When monthly options are concerned, you are given more time premium which actually allows you to have a wider profit tent when you are carrying out things just like double diagonal spread.
Popular Strategies of Weekly Options
The following strategies are the main trades when it comes to weekly options.
Selling Covered Calls – This strategy has been a successful trade when stocks like AAPL and NFLX with longer time premiums every week are concerned. This strategy involves selling weekly calls that are near its term while being far from the money call that actually trades closely with the underlying stock’s price moves.
Pinning Trades – This strategy will include pinning trades on expiration date. An example for this strategy is selling straddles, ratio and out of money put or call verticals.
Naked Puts – This is selling out of money put spreads on the stock that you would not mind being long when the stock is put to you.
When the stock is put to you that are from the short put you sold then once you are already long the stock, you can now start selling near the money calls alongside your long stock until it is then called away from you. You can then resell put again until it is put to you. Strategies that involve weekly options have risks. One risk of this type of strategy is that if the stock gaps far down with either of the short put options or long the stock. But when you feel like the market is getting risky you can always opt to place a long put that will serve as a protection.
Calendar Trades – This strategy will include selling near term weekly options to pay for the long term call that you have.
These are the main trades but you can also opt to other trades of lower probability or success. However, you should consider keeping the stock on its place when you do the trades. In order to do this, you have to search for the underlying so that you can be in the tight trading range.
Short Term Advantage of Weekly Options
It cannot be denied that with the creation of weekly options, traders are given advantages that they could not find in monthly options. This advantage is the fact that with weekly options, making a very short term bet on a specific news item or an anticipated abrupt price movement is possible. To further understand this advantage, let us take for example on the first week of the month you anticipated the ABC stock is going to move perhaps due to the report of their earnings is due to come out on this week. When you buy or sell the ABC monthlies to profit from your theory, you are actually going to risk three weeks worth of premium when you are proven wrong. With the weekly options, you can only risk one week’s worth of premium. With the weekly options, you can surely save money even if you are wrong and offer you a nice return in the event that you are right.