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

  • 7 Ways To Avoid Forex Scams

    Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams:

    By Kim,

    • 0 comments
    • 135 views
  • Historical Performance of Selling S&P 500 OTM Calls

    If you’re comfortable owning an S&P 500 index fund, you should also be comfortable with covered calls. For example, CBOE publishes data on a simple covered call strategy with their BXMD index. The description from CBOE is as follows:

    By Jesse,

    • 0 comments
    • 141 views
  • Are Trusts the Best Way to Leave Money to Your Heirs?

    First, this is a general comment. Every person’s situation is different. I could say “95% of people don’t need this,” and you could be in the 5% who do. So, don’t ever make personal investment or estate planning decisions based on an online post, contact an actual investment advisor or attorney - most will have initial conversations for free (I do).

    By cwelsh,

    • 0 comments
    • 122 views
  • Anchor and Steady Momentum update

    As our members know, we introduced a new strategy to our members few months ago - Steady Momentum. The goal is to produce higher risk-adjusted returns than the underlying indexes. We also introduced a new version of our Anchor Trades strategy. This post will provide an update on both strategies. 

    By Kim,

    • 0 comments
    • 192 views
  • GBP/USD: If Boris Johnson Becomes PM, Volatility will Rise

    UK PM May is set to step down and Boris Johnson is the leading candidate to replace her. The erratic former foreign secretary may increase GBP/USD volatility. Despite Johnson's Brexit credentials, he could surprise and be pound-positive.

    By Kim,

    • 0 comments
    • 259 views
  • How Steady Momentum Captures Multiple Risk Premiums

    Our Steady Momentum PutWrite strategy attempts to outperform the CBOE PUT index, which writes cash secured puts on the S&P 500. An investable version of this strategy can be purchased with the ETF PUTW. The historical data for PUT extends back more than 30 years, highlighting how writing puts can be an attractive strategy.

    By Jesse,

    • 0 comments
    • 202 views
  • What Options Traders Need to Know About Dividends

    Higher dividends are better, right? Yes, usually. But not always. Dividends are a fundamental indicator and many options traders are not interested in fundamentals. But as a means for picking stocks on which to trade options, some fundamentals offer great insight.

    By Michael C. Thomsett,

    • 0 comments
    • 300 views
  • BTC/USD Struggles To Maintain Newly Conquered Territory

    The first condition to declare the market is in bullish mode has been fulfilled. Now it is Ethereum's turn to assume its part of the game. XRP/USD keeps a low profile, waiting for its chance. We begin the week of analysis celebrating the bullish behavior of Bitcoin late on Sunday.

    By Kim,

    • 0 comments
    • 285 views
  • Fear of Options Assignment

    One of the most common fears in option trading is one of early assignment.  The fear of having a large number of shares (or a large short position) coupled with a potential margin call (or Reg-T call) causing a sudden shortage of cash in their accounts worries investors.  Investors commonly view assignment as a huge potential risk.

    By cwelsh,

    • 1 comment
    • 431 views
  • The Value of Equity Asset Class Diversification

    This investing lesson is a tale of two time periods that highlight the important role of equity asset class diversification and systematic rebalancing in an equity fund portfolio.  Human nature is a failed investor, when our natural instinct is often to do the exact opposite of what we should do in practice.

    By Jesse,

    • 0 comments
    • 352 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