SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

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?

12 Years CAGR of 127.5%

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Harnessing Monte Carlo Simulations for Options Trading: A Strategic Approach

    In the world of options trading, one of the greatest challenges is determining future price ranges with enough accuracy to structure profitable trades. One method traders can leverage to enhance these predictions is Monte Carlo simulations, a powerful statistical tool that allows for the projection of a stock or ETF's future price distribution based on historical data.

    By Romuald,

    • 1 comment
    • 3,772 views
  • Is There Such A Thing As Risk-Management Within Crypto Trading?

    Any trader looking to build reliable long-term wealth is best off avoiding cryptocurrency. At least, this is a message that the experts have been touting since crypto entered the trading sphere and, in many ways, they aren’t wrong. The volatile nature of cryptocurrencies alone places them very much in the red danger zone of high-risk investments.

    By Kim,

    • 0 comments
    • 1,317 views
  • Is There A ‘Free Lunch’ In Options?

    In olden times, alchemists would search for the philosopher’s stone, the material that would turn other materials into gold. Option traders likewise sometimes overtly, sometimes secretly hope to find that most elusive of all option positions: the risk free trade with guaranteed positive outcome:

    By TrustyJules,

    • 1 comment
    • 17,325 views
  • What Are Covered Calls And How Do They Work?

    A covered call is an options trading strategy where an investor holds a long position in an asset (most usually an equity) and sells call options on that same asset. This strategy can generate additional income from the premium received for selling the call options.

    By Kim,

    • 0 comments
    • 2,788 views
  • SPX Options vs. SPY Options: Which Should I Trade?

    Trading options on the S&P 500 is a popular way to make money on the index. There are several ways traders use this index, but two of the most popular are to trade options on SPX or SPY. One key difference between the two is that SPX options are based on the index, while SPY options are based on an exchange-traded fund (ETF) that tracks the index.

    By Mark Wolfinger,

    • 0 comments
    • 6,669 views
  • Yes, We Are Playing Not to Lose!

    There are many trading quotes from different traders/investors, but this one is one of my favorites: “In trading/investing it's not about how much you make, but how much you don't lose" - Bernard Baruch. At SteadyOptions, this has been one of our major goals in the last 12 years.

    By Kim,

    • 0 comments
    • 4,132 views
  • The Impact of Implied Volatility (IV) on Popular Options Trades

    You’ll often read that a given option trade is either vega positive (meaning that IV rising will help it and IV falling will hurt it) or vega negative (meaning IV falling will help and IV rising will hurt).   However, in fact many popular options spreads can be either vega positive or vega negative depending where where the stock price is relative to the spread strikes.  

    By Yowster,

    • 0 comments
    • 6,468 views
  • Please Follow Me Inside The Insiders

    The greatest joy in investing in options is when you are right on direction. It’s really hard to beat any return that is based on a correct options bet on the direction of a stock, which is why we spend much of our time poring over charts, historical analysis, Elliot waves, RSI and what not.

    By TrustyJules,

    • 0 comments
    • 3,754 views
  • Trading Earnings With Ratio Spread

    A 1x2 ratio spread with call options is created by selling one lower-strike call and buying two higher-strike calls. This strategy can be established for either a net credit or for a net debit, depending on the time to expiration, the percentage distance between the strike prices and the level of volatility.

    By TrustyJules,

    • 0 comments
    • 4,860 views
  • SteadyOptions 2023 - Year In Review

    2023 marks our 12th year as a public trading service. We closed 192 winners out of 282 trades (68.1% winning ratio). Our model portfolio produced 112.2% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month and one essentially breakeven in 2023. 

    By Kim,

    • 0 comments
    • 9,394 views

  • Like 1
  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