4 Ways You Can Trade Weekly Options in Your Portfolio
In addition to the variety of monthly contracts available, many underlying stocks now 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. Here are four ways to trade weekly options in your portfolio.
The growth in popularity of weekly options can provide additional strategies to create more flexibility in your portfolio. There are adavantages, and some potential disadvantages, to weekly options. Below I discuss four strategies you can use with weekly options.
Differences Between Weekly & Monthly Options
Weekly options are different because 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
An investor can use weeklies as a pure play. Because they are not open as long, they 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.
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.
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.
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 investor 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.