Weekly Options: 5 Things to Know

Weekly options are very powerful tools in the hands of a trader that understands them but can do serious damage in the account of a trader that uses them to gamble. Weekly options can be great trading tools if the position size is right and they are used inside of a quantifiable trading system that is structured for big wins and small losses. Weekly options have very high Deltas and most of them are very liquid. They are ideal for traders that are trading on a daily or weekly time frame with entries and exits in their preexisting stock trading system. Weekly options are tools for risk management on the long side if traded with in-the-money options as replacement for stock. Far out-of-the-money weekly options should only be used for technical reasons so their is a high probability that they will increase in value in their timeframe. Traders get in trouble with  weeklies when they buy them as lottery tickets without a good technical reason for their strike price. An option trader can then compound their mistake of a low probability trade by also buying far to big a position in their low probability option.

Weekly options can give a trader access to control large blocks of stock for minimal capital used on a short time frame. They are dangerous if an option trader buys to far out-of-the-money options because the odds are that time will run out and they will end of being worth nothing, remember you only have one week for the option to move enough in your favor to be able to lock in profits. It is also not a good idea to sell them without a hedge because you are taking on unlimited risk for a very small fee, getting on the wrong side of a trend when you are short an unhedged weekly option can be very expensive, very quickly. The most simple way I have found to use them is to buy them in-the-money to capture directional trends. If you want to sell them for premium I believe the best way is to sell both the call and put at the money and then hedge by buying  farther out of the money call and puts on each side, a butterfly option play over and over again. Weekly options do not have the same ability to go very far out in strike price to sell them like monthly options do because of the short time frame before expiration.

  1. Weekly options should only be traded with the same position size you would use while trading the underlying stock. If you normally trade 100 shares of Apple then only trade 1 Apple option contract. Trading 10 option contracts when you can’t handle the loss from a larger position size is very dangerous to your account and could blow your account up sooner rather than later. Trading the proper position size with options for your account will also turn down the volume on your emotions and make it easier to follow the trading plan you had when you entered the trade.
  2. When you use in-the-money options you have much better odds of success because you only have to pick the direction of the move, with out-of-the money options you have to pick the direction, the amount of the move, and the time period, this is a way to put the odds in your favor with options by not  having to overcome Vega or Theta priced in. Stock replacement using weekly in-the-money options is the most simple way to start out when transitioning from stock  trading to option trading.
  3. While weekly options provide great asymmetric trades with an unlimited upside and limited downside there is still capital at risk and you should be careful not to be tempted to make a huge trade with weeklies because you are positive that you will win, over confident trades are the most dangerous because they cause some traders to risk too much. Weekly options can appeal to a trader’s greed and lure them to overestimating the odds of success with an option or the risk exposure. Be extra careful to not let winning streaks lure you to drift into bigger and bigger position sizes as your ego starts to make you feel invinsible.
  4. When you have an option that has gone deeper in-the-money due to a trend it is better to sell that option and roll it to one that is closer to the money so you can take your profits off the table and remove them from being at risk and buy a new option that continues to capture the trend but with less capital at risk.
  5. New weekly options start trading each Thursday morning on stocks that have them so it is easy to roll a trade to new options and not have to exit the trade just because your options expired on Friday.

If you do not understand options then you should not be trading them at all until you do.