Time is an essential component in options trading.
As time goes on, option contracts you hold experience time decay. They lose value as they approach their expiration date.
Many Options Traders will purchase options that expire weeks or months away.
However, there is a popular and short-term set of options called Weekly Contracts, which experience heavy trading volume over a very short period.
Today we will discuss what weeklys are, how they are different from other options contracts, and how to trade them.
Weekly Options Defined
The Chicago Board Options Exchange (CBOE) introduced weekly contracts in 2005, making them relatively young securities.
Options Traders wanted a tool that would allow them to trade options at a higher volume with less constraints than monthly options offered.
Weekly options look identical to their monthly counterparts, but they have a very distinct difference.
Monthly options expire once every 30 days, and this gives Traders 12 Explorations per year.
Weekly options, on the other hand, expire every week, as the name implies.
What is the benefit of weekly expirations?
The most straightforward answer is the ability to capitalize on short-term movements in a stock price or trading on short-term news without putting a longer-term position at risk.
For example, suppose you have a position in ABC company utilizing monthly contracts or holding shares of the stock. They will be releasing quarterly earnings in two weeks. In that case, weekly contracts will enable you to profit off the quarterly earnings without affecting your long-term positions.
Since time decay is so rapid in a weekly contract, they will only Spike and price due to large share price movements.
The core principle of weekly options is analogous to monthly options. The Trader’s goal is to capitalize on a movement, or lack thereof, in a stock’s underlying strike price.
However, since time decay is so strong in these contracts, it’s vital to understand how to set up a trade to attain your desired outcome.
Referencing our earlier example with ABC company, a Trader anticipates positive earnings news, which will result in a spike and the share price.
Buying weekly calls or selling weekly puts would both belong, bullish trades that could be deployed to capitalize on this positive news.
Placing a long call order for a weekly option is similar to setting the same trade with the monthly option; however, time is not on your side as the trader.
The passage of time for your position to yield profits is only a week, so during your research, look for companies with high trading volumes and are expected to experience a dramatic price change.
Long weekly calls can also help you turn a quick profit from breaking company news.
For example, suppose a pharmaceutical company gets a medical trial approved or a tech company releases a surprise new product. In that case, weekly options can enable you to Leverage this news into a sizable return without costing you weeks of Premium as a monthly option would.
Selling weekly puts deposits the Premium into your account. As long as the stock price shoots up or doesn’t move very much, you will keep the Premium what’s the contract expires.
it’s important to remember that selling naked options can be extra risky since there’s potentially unlimited upside if the trade goes against you.
If you want to sell weekly puts, you may want to head your position by setting up a simple spread or having the shares of stock to cover your position if needed.
Weekly options also present a unique vehicle to enter into a short position without spending weeks of Premium on time decay or engaging in a short sell position and potentially risking a short squeeze.
Another benefit of entering short positions with weeklies is to recoup any losses on bullish positions you may have in a company.
For example, if you have a long stock position in ABC company or you have long options that expire many months away, negative news or earning this will cause your position to lose value in the short-term.
Weekly’s are the perfect tool to profit from this short-term decrease. At the same time, you wait for your long position to regain its original value.
You can sell weekly calls and collect their Premium as a bearish strategy. As with all naked sales, do your research and make sure that you pay close attention to the share price if the trade goes against you.
Selling weekly options is an excellent way to generate some income while you’re waiting for other positions to show returns.
If you anticipate a Stock’s earnings will be bad or Miss expectations, you can make a quick short position by buying weekly puts. If you want this position to be profitable, ensure that you research the trading volume and macro-trends behind your trade.
While you can use weekly plates to profit from a sharp decline in an underlying stock price, you can also utilize a rolling trade, which creates a constant Hedge on a long portfolio.
For example, suppose you are long ABC company with monthly calls. In that case, you can sell weekly puts to generate income and have a Perpetual hedge on your naked lawn option.
Putting it all together
As you can see, weeklys Act like their monthly counterparts; however, they create unique opportunities and strategies to profit from very short-term news and trends.
Weekly’s also create an excellent opportunity to engage in profitable hedging strategies if you are waiting for larger positions to show returns.
What are Weekly Options and How do You Trade Them? was originally published in Lantern on Medium, where people are continuing the conversation by highlighting and responding to this story.