4 Ways You Can Trade Weekly Options In Your Portfolio

In addition to the variety of monthly contracts available, many underlying stocks are beginning to offer weekly options. These weekly options can be employed in various trading strategies to manage both the theta and delta risk associated with options expiration. Overall, the growth in weekly options can provide a richer strategy platform that should not be overlooked.

Weekly Options

Differences Between Weekly & Monthly Options

Before discussing the various trading strategies that can be build with weekly options, it is important to go back and review some of the more important trading terms. Remember that weekly options are different in that they have a much shorter lifespan. Most of these weekly options start trading on Thursday and expire the following Friday. This provides uniformity and also allows traders to easily “roll” weekly options from one expiration to another.

Four Strategies You Can Use

1) An investor can use weeklies as a pure play. Because they do not remain open as long, the may involve somewhat less risk, but it is important to consider liquidity constraints, as many weeklies have smaller markets. The lower risk of a shorter holding period is lost if the instrument is illiquid and the investor cannot trade the position when needed.

2) Offsetting positions can be taken at certain times during the month between weeklies and monthlies. When the options expiration of the monthly contract is nearly identical to the expiration of the weekly option, there may be a price difference that can be captured between the two.

3) You could take a position in the monthly contract and take rolling positions in the weekly contract in the opposite direction. The idea is to establish a consistent hedge against short term market volatility but make sure that you factor in the higher transaction costs for getting in and out of the market more often.

4) The last approach to using weekly options is to use them to supplement income from an underlying position. This is often called a call writing strategy because the investor who owns the underlying instrument writes calls on that position and collects the premium. If the underlying remains static or falls, the investors makes a profit or mitigates losses. If the underlying rises, he or she may miss some of the profit, but the downside protection is used to justify this risk.

What About Trading Daily Options?

Rumors have been floating around the web about the possibility of daily options as the next logical product for traders. We already had monthly options and weekly option popularity is growing fast. Add your comments below and let me know if you would ever trade a daily option that started trading in the morning and expired that same afternoon.

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  • http://twitter.com/optionsdoc_phd Richard Pfeffer

    I don’t understand the following remark because the options exchanges do not offer new weeklies with the same expiration dates as the monthlies. Can you gave me an example of a stock for which there are weeklies that expire on nearly identical dates as monthlies?

    “2) Offsetting positions can be taken at certain times during the month between weeklies and monthlies. When the options expiration of the monthly contract is nearly identical to the expiration of the weekly option, there may be a price difference that can be captured between the two.”

    Thank you,
    Richard

    • Kirk

      Hey Richard, that’s why I said nearly identical – not that they expire exactly the same time but the idea is that you can take an offsetting or hedge position on a given week that you may have a monthly option expire.

  • Bill Place

    I have been trading weekly spreads for a little while. Have done well with them, however, you cannot sleep at night as well with weeklys as you can with monthlies. I would like for Kirk to give them a whirl. I think you could do really well with these if you stick with being conservative like you do with monthlys.

    • Kirk

      I have been testing weekly strategies more and more as the grow in popularity so that maybe a new focus this year.

  • dean

    Just traded in and out today as expired today (Friday) I exit trades on expiration Friday often.
    I think daily options are good thing. Best to trade right ATM for higher gamma ! Is this going to make extra work for brokers checking if have enough money for settlement or risk ?

  • http://twitter.com/optionsdoc_phd Richard Pfeffer

    Can you give me one or two examples of the following?

    “2) Offsetting positions can be taken at certain times during the month between weeklies and monthlies. When the options expiration of the monthly contract is nearly identical to the expiration of the weekly option, there may be a price difference that can be captured between the two.”

    • Kirk

      @Richard Pfeffer, Yeah usually as we get closer to expiration there will be a closer weekly option that expires 5 days before the monthly. For example, the January contracts that expired last week also had a weekly 5 days away. What I was trying to get at in the post was that you can use these as a hedge against a monthly position as you near expiration. Rather than buy another full monthly contract, just use the weekly that is close to the monthly expiration to partially hedge the risk until expiration week.