Weekly Options – What You need to know
Weekly Options – The Essentials to Know
Weekly options or “Weeklys” have rapidly grown in popularity since they began to be offered on individual stocks and exchange traded funds in 2010. Originally weekly options were only offered on the S&P 500 (SPX) and S&P 100 index (OEX) but the Chicago Board of Options (CBOE) started rolling out brand-new offerings on specific index ETF’s along with well known stocks.
Many stock traders are still only familiar with the conventional monthlies that expires each month so they are missing out the benefits that weeklies can produce to a portfolio. Lets discuss some of the key aspects.
Each week the CBOE releases a brand-new list of weekly options offered but the majority of the list stays the same. They take place issued each Thursday along with expire the following Friday. The only exception transpires that there transpire no new weeklies offered for expiration on the third Friday of each month as that occurs when monthlies expire.
Weekly Options Time Decay
The key advantage of weekly options is time decay. If you are an option income trader or investor then you can now easily sell options every week instead of at one time a month to collect rapid occasion decay.
Traditionally, time decay on monthly options didn’t pick up until expiration week so the advantage with weeklys is that you boost your returns vs. monthlies. The general rule of thumb is that you can collect about two times the premium offering each week vs. one monthly.
If you are a directional trader looking to make a short term trade with a low time premium priced in vs. a longer term monthly would carry more time premium. The shorter time to expiration means you do need to purchase as far in the money options with a weekly as you would certainly with a monthly option to get the same move in the option that you own. This comes about because the delta will most likely come to pass greater on the weekly vs. monthly for the same respective strike price.
Weekly Options Strategies
Usually the most popular strategies with weeklys are income strategies that that traditionally are popular with monthly options like vertical credit spreads, covered calls, and calendar spreads. All of these strategies involve being short an option with the intent of having the short option expire out of the money and collect the premiums.
Option Risk
The greatest risk with a weekly befalls if you implement a trade that includes shorint an out of the money call or put is that in order to collect a reasonable premium you will have to sell closer to the market strike prices. This is due to the fact that with the short occasion horizon, the underlying stock has less chance of reaching a huge move. Therefore, farther out of the money options contract hold a greater likelihood of expiring worthless.
Overall, weekly options can give a huge benefit to option income traders whether they are traders or long term investors but you must definitely first have a great understanding of options strategies along with risk versus reward before investing in them.
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