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.

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

    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

    • 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
      • 453 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
      • 904 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
      • 806 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
      • 480 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
      • 1,492 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
      • 5,903 views
    • Call And Put Backspreads Options Strategies

      A backspread is very bullish or very bearish strategy used to trade direction; ie a trader is betting that a stock will move quickly in one direction. Call Backspreads are used for trading up moves; put backspreads for down moves.

      By Chris Young,

      • 0 comments
      • 9,501 views
    • Long Put Option Strategy

      A long put option strategy is the purchase of a put option in the expectation of the underlying stock falling. It is Delta negative, Vega positive and Theta negative strategy. A long put is a single-leg, risk-defined, bearish options strategy. Buying a put option is a levered alternative to selling shares of stock short.

      By Chris Young,

      • 0 comments
      • 11,149 views
    • Long Call Option Strategy

      A long call option strategy is the purchase of a call option in the expectation of the underlying stock rising. It is Delta positive, Vega positive and Theta negative strategy. A long call is a single-leg, risk-defined, bullish options strategy. Buying a call option is a levered alternative to buying shares of stock.

      By Chris Young,

      • 0 comments
      • 11,530 views
    • What Is Delta Hedging?

      Delta hedging is an investing strategy that combines the purchase or sale of an option as well as an offsetting transaction in the underlying asset to reduce the risk of a directional move in the price of the option. When a position is delta-neutral, it will not rise or fall in value when the value of the underlying asset stays within certain bounds. 

      By Kim,

      • 0 comments
      • 9,673 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