SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Are Weekly Options a Form of Gambling?


Options traders do not have to act as gamblers … even though many do. There may be a thin line between trading and gambling, and that line is obscured when it comes to weekly options. If you utilize options to reduce risk, it is smart trading. But if you treat options trading like a bet on red or black in a roulette game, then you’re not hedging; you’re gambling.

Options, used wisely, can and do hedge market risks. Many strategies, from the basic covered call to uncovered puts, covered strangles, collars and even butterflies or condors, all can be used as risk-neutral hedging strategies. The percentages go way up in your favor when you combine conservative strategies with short-term expiration (for short positions), proximity (or underlying price to strike and of underlying price to resistance or support) and identification of reversal signals with confirmation.


That’s basically the way that options can be used to move the probabilities in your favor.


Are there differences between probabilities and odds? It’s the same thing, but gamblers like to think of winning and losing as playing the odds, and they invariably believe they can overcome the averages. Even a roulette bet on black or red, often thought of as a 50/50 bet, is not quite that favorable. With the zero and double-zero in mind, the odds of winning on a black or red bet are 47.4%, not 50%. There are 18 black, 18 red and 2 green outcomes, so black or red is an 18 out of 38 probability (18 ÷ 38 = 47.4%). This means that if you bet on either red or black consistently, you will eventually lose.


The odds are slightly better with weekly options, but it’s only a 50-50, or an even bet.

Image result for blackjack gambling


First introduced in 2005, weekly options exist for a short term only, just 8 days. They are set up every Thursday and expire the following Friday.

At first glance, weekly options are very cheap. But it could also be a sucker bet, just like the seemingly favorable rules on many casino games. For example, you can buy a weekly call option and accept the odds of the underlying price moving high enough by next Friday to make it profitable (meaning intrinsic value outpaces time decay). The same observation works for weekly puts, but in the opposite direction.


You are giving up the advantage of a longer term in exchange for a cheaper premium. But for a long position, this seems like a long shot, to use the terminology of gambling.


For short options, the odds move very nicely in favor of the trader.


Because time decay will be rapid, opening a short weekly option can be very profitable. The dollar amounts are not huge, but the annualized return can take you to double digits. In fact, on average, options lose one-third of remaining time value between the Friday before expiration and Monday. This is because three calendar days pass but only one trading day. This is a fact often overlooked by traders: Time decay takes place every day, whether the market is open or not.


This represents a great value. Going short, either with calls or puts, is a great advantage using weekly options.


A few suggestions for increasing the odds (probability) in your favor:

  1.  Build in a buffer when possible. This is a distance between the option’s strike and current price of the underlying. By keeping the position out of the money, you receive less for the position, but you also reduce exposure to exercise. As the underlying moves toward the money, the OTM call or put can be closed or rolled to avoid exercise. But there is a good chance that time decay will outpace intrinsic value.
     
  2. Pay attention to resistance and support. The most advantageous timing to open a short option is when the underlying price moves above resistance (timing to open a short call) or below support (open a short put). Assuming the price does what it usually does – retrace back into range – this timing maximizes your probability. This is especially true if the move outside of the trading range occurs with a price gap.
     
  3. Look for reversal signals and confirmation. Pay attention to traditional Western signals like double tops or bottoms or island clusters; candlesticks; volume spikes; moving average convergence; and momentum oscillators. Only act when you find the signal and confirmation; this increases your chances for success.
     
  4. Pay attention to strength or weakness in the trend. The best reversals happen when a previously strong trend reaches a plateau, slows down, and then turns in the opposite direction.

Weekly options can be summarized with the long and short attributes in mind. Long traders must fight against time decay and time. Short traders benefit from time decay and time. With the four guidelines in mind, what otherwise could be 50-50 odds are moved nicely in your favor.


Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Building a Short Strangles Portfolio

    In my last article I showed you what you can expect selling short strangles and straddles and how much leverage is appropriate. Today I want to show you how to build a well diversified short strangle/straddle portfolio and how to trade it through difficult times.

    By Stephan Haller,

    • 7 comments
    • 245 views
  • Selling Short Strangles and Straddles - Does it Work?

    I have seen a lot of discussions on Twitter lately about the issue if selling naked strangles or straddles is a great strategy or a recipe for disaster. If you have read my books or if you are following my sample portfolio, you know that I'm a huge fan of selling short strangles and straddles.

    By Stephan Haller,

    • 46 comments
    • 802 views
  • Who Wants The Last Nickel?

    “The safest way to double your money is to fold it over and put it in your pocket.” Kin Hubbard. In this article I will discuss the reasoning behind buying back the short options and not waiting till expiration. Two of my basic trading tenets are related:   

    By Mark Wolfinger,

    • 0 comments
    • 39 views
  • Debunking the "Trading Options for Income" Myth

    "Real trading system returns are too irregular in the short term for consistent weekly returns every time and the only 'trader' that every had regular monthly returns was Bernie Madoff" - Steve Burns. So true. This is why "trading options for income" promoted by some options "gurus" is so misleading.

    By Kim,

    • 0 comments
    • 337 views
  • Selling Naked Strangles: The Math

    Selling short (naked) strangles is heavily promoted by some options "gurus". Is it a good strategy? It might have an unlimited (theoretical) risk, but what about the return? Is the return worth the risk? We decided to do some math, based on real prices, not some theoretical "studies".

    By Kim,

    • 6 comments
    • 533 views
  • Don’t Buy Thanksgiving Turkeys as Investments

    Nassim Taleb tells a great story about Thanksgiving turkey’s in his 2007 book, The Black Swan. "Consider a turkey that is fed every day…Every single feeding will firm up the bird's belief that it is the general rule of life to be fed every day by friendly members of the human race 'looking out for its best interests,' as a politician would say.

    By Jesse,

    • 0 comments
    • 144 views
  • Obey Reality and Win by Not Losing

    “I’ll do anything to lose weight (except diet and exercise),” is the same kind of magical thinking by investors who will do anything to outperform the market except study and practice discipline. It takes novice investors about a year to realize that you can’t consistently beat or time the market buying individual stocks or funds.

    By Kim,

    • 0 comments
    • 164 views
  • Follow Your Plan: Don’t Engage in Reckless Trading

    Setting up some internal rules for your trading looks like a must first-step before setting up your account and getting into your platform. You need to get your own trading plan and then stick to it. Self-discipline and avoiding recklessness can be huge for your balance.

    By Kim,

    • 0 comments
    • 231 views
  • 4 Patterns For Forex Profitability

    What makes a forex trader profitable? Looking at a wide array of real data, four patterns are found. Timing is critical. The best time to trade is not necessarily what you thought it would be, and it certainly depends on the trading style.

    By Kim,

    • 0 comments
    • 276 views
  • Long and Short Straddles: Opposite Structures

    Simplification: We can all better understand options trading by removing the complexity so often seen in articles. One of the best ways to understand the profit potential and risk levels of any options strategy is through diagrams and a demonstration of the formula.

    By Michael C. Thomsett,

    • 0 comments
    • 321 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs