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.

Sign in to follow this  
Followers 0

The Use And The Abuse Of The Weekly Options


Options trading is becoming more and more popular every year. The options become more liquid and more traders use them for hedging, speculation, income etc. Weekly options, first introduced by CBOE in October 2005, are one-week options as opposed to traditional options that have a life of months or years before expiration.

What are Weekly Options? 

For those less familiar with options, they expire on the third Friday of every month. Weekly options, first introduced by CBOE in October 2005, are one-week options as opposed to traditional options that have a life of months or years before expiration. New series for Weekly options are listed each Thursday and expire the following Friday. 

Not every stock or index has weekly options. For those that do, it basically means that every Friday is an expiration Friday. That opens tremendous new opportunities but also introduces new risks which can be much higher than "traditional" monthly options. 

Let's see for example how you could trade Apple (AAPL) using weekly or monthly options. 

 

Are they cheap? Lets buy them. 
 

Apple took a hit after their recent rare earnings miss. Many people think that the selloff is overdone. They want to use the recent pullback as a buying opportunity. The stock closed at $585.16 on Friday, July 27, 2012. Looking at ATM (At The Money) options, we can see that August 18 (monthly) calls can be purchased at $10.10. That would require the stock to close above $595 by August 18 just to break even. However, the weekly options (expiring on August 3, 2012) can be purchased at $6.15. This is 40% cheaper and requires much smaller move. 
 

However, there is a catch. First, you give yourself much less time for your thesis to work out. Second and more importantly, the weekly options are much more exposed to the time decay (the negative theta). 
The theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend. 
 

For the monthly 585 calls, the negative theta is -$0.22. That means that the calls will lose ~2.2% of their value every day all other factors equal. For the weekly calls, the negative theta is a whopping -$0.43 or 7% per day. And that number will accelerate as we get closer to the expiration day. You better be right, and you better be right quickly. 

 

Buying is too risky? Maybe selling is better? 

If this is the case you might say - why not to take the other side of the trade? Why not to use the accelerating theta and sell those options? Or maybe be less risky and sell a credit spread? A credit spread is when you sell an option and buy another option which is further from the underlying price to hedge the risk. 

Many options "gurus" ride the wave of the weekly options and describe selling of weekly options as a cash machine. They say that "It brings money into my clients account weekly. Every Sunday my clients access their accounts and see + + +.” They advise selling weekly credit spreads and present it as a "a safe option strategy because we’re combining an option purchase with an option sale resulting with a credit into your account". 

This strategy can work very well.. until it doesn't. 

Imagine for example someone selling a 133/134 SPY credit spread on Thursday with SPY below $132. That seems like a pretty safe trade, isn't it? After all, we have just one day, what could possibly go wrong? The options will probably expire worthless and the clients will see more cash in their account by Sunday. Well, after the market close, good news from the EU summit took traders by surprise. The next day SPY opened above $135 and the credit spread has lost 100%. So much for the "safe strategy". 

By the way, this was a real trade recommendation from one of the options "gurus". He is charging $2,500 for his advice. 

So what is the biggest problem with selling the weekly options? The answer is the negative gamma. 

The gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy. 

When you are short weekly options (or any options which expire in a short period of time), you have a large negative gamma. Any sharp move in the underlying will cause significant losses, and there is nothing you can do about it. 

 

The Bottom Line 

So is the conclusion that you should not trade the weekly options? Not necessarily. They can be a good addition to a diversified options portfolio - as long as you are aware of the risks and allocate only small portion of the account to those trades.

 

Link to the original article

 

Related articles:

 

    Want to learn how to reduce risk and put probabilities in your favor?


    Start Your Free Trial

    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

    • A Global Equity Put Write Portfolio

      Many that sell equity market put options focus on the S&P 500 (SPX, XSP, SPY). Some will add small caps by selling puts on the Russell 2000 (RUT, IWM). An investor could also make their put selling strategy globally diversified by adding MSCI EAFE (EFA) and Emerging Markets (EEM).

      By Jesse,

      • 0 comments
      • 199 views
    • The Random Walk Hypothesis

      The “random walk hypothesis” (RWH) is one idea about how stock prices behave – but only one of many. It is a theory promoted in academia and believed in my many, but not so much by traders involved with handling real money. Theories aside, is the market truly random?

      By Michael C. Thomsett,

      • 0 comments
      • 279 views
    • How To Trade Options Successfully

      I’ve now been trading options for over a decade and been associated with Steady Options for seven years – hard to believe.  Over that period, I’ve learned quite a bit about option trading; how to improve, what not to do, and generally how the option markets work. I’m still learning.

      By cwelsh,

      • 3 comments
      • 525 views
    • January 2019 Performance Analysis

      No one likes losing money, and no one likes hearing "excuses". However, in an effort to be fully transparent, solicit feedback, and to improve our own performance, we're writing this article to do a further breakdown of the losses which our model portfolio incurred in January 2019. 

      By Kim,

      • 17 comments
      • 1,322 views
    • Island Clusters as Strong Reversals

      Options traders constantly seek the elusive reliable reversal signal. A few unusual but strong reversals are worth looking for, and their patterns reveal likely exceptional timing for opening or closing option trades. One example of this exceptionally strong signal is the island cluster (or, island reversal).

      By Michael C. Thomsett,

      • 0 comments
      • 357 views
    • What’s Wrong With Your 401(k)? (If anything)

      There currently are over sixty million Americans that are active 401(k) participants, and well over 500,000 total active 401(k) plans offered by employers in the United States.  Despite these high numbers, usages could be higher, as the US Census Bureau estimates that only 41% of all employees with access to a 401(k) plan utilize it, with even less funding it fully.

      By cwelsh,

      • 0 comments
      • 439 views
    • Upcoming Decay of Options

      I am on the hunt for a short volatility position for three main reasons. First, the market’s wild swings have, for the time being at least, diminished. Second, option activity has dried up as my options barometer continues to be stuck in the 4 – 6 range as traders are not making big bets in either direction.

      By Jacob Mintz,

      • 0 comments
      • 520 views
    • The Scientific Process of Increasing Expected Returns

      For many US investors, the "base case" for equity investing is US large cap stocks, most commonly benchmarked as the S&P 500. You could absolutely do far worse than owning these 500 great US companies, and the weight of the evidence suggests that most actively managed mutual funds that benchmark themselves against the S&P 500 index have in fact done worse.

      By Jesse,

      • 0 comments
      • 902 views
    • Those Golden and Death Crosses

      The use of moving average (MA) for predicting future price behavior must be undertaken cautiously. MA is a lagging indicator, so the question must be: Can a lagging indicator provide guidance for the future? Yes. The use of two MA lines and how they interact is a reliable form of reversal indicator.

      By Michael C. Thomsett,

      • 0 comments
      • 632 views
    • Trading Reverse Iron Condors When IV Is Elevated

      Our members know that pre earnings straddles and calendars have been our bread and butter strategies in the recent years. We enter those trades when the prices are cheap compared to previous cycles. However, in the last few months of 2018, Implied Volatility exploded, making most of those trades too expensive.

      By Kim,

      • 0 comments
      • 706 views

      Report Article
    Sign in to follow this  
    Followers 0


    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