When options were introduced around 35 years ago (calls and puts), they ushered in a brand-new era of … well … options!
Individual investors could now protect their entire portfolios from a market crash. They could also use options to generate extra income, and design option strategies to take advantage of both volatile and non-volatile times in the market.
Throughout the years, the number of stocks and other financial instruments with options available to trade has grown and grown. Options trading volume has skyrocketed as well, with individual investors increasingly becoming attracted to this liquid and lucrative marketplace.
Many people are attracted to the fast potential returns that options offer. And now, there’s another way to use options to make even-quicker gains.
Approximately 18 months ago, a new kind of option arrived on the scene that gives us yet another way to make money with options. That was when weekly expiring options were created for the first time on a select number of stocks, Exchange-Traded Funds and market indices, in addition to the standard monthly options you may be familiar with already.
Weekly options, or “weeklies,” have created opportunities that have never existed before to profit on some of the market’s hottest names — Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Baidu (NASDAQ:BIDU), etc. — and also to profit because of the volatile nature of today’s stock market.
Over the next few weeks, I’ll be sharing with you some compelling, straightforward insights and from-the-trenches experience when it comes to making money in the new world of weekly expiring options. In the meantime, let’s take a look at how weekly options work, and why it may make sense for you to add these incredible instruments to your trading routine. I’ll also show you a trade you can make right now to take advantage of them!
A Smaller Window of Time Can Lead to Bigger Overall Returns
One of the most compelling aspects of weekly options is how they’re priced. When you take a single week’s option premium and multiply it by four (to equal one month), you’ll notice it equals roughly DOUBLE what the one-month premium is trading for.
From an option seller’s point of view, you quickly see how darn cool this is. (In an upcoming post, I’ll talk about making money “8 Days a Week” and why, like the Beatles song, you’ll have “nothing but love” for it. Stay tuned!)
One of the most profitable ways I like to trade weekly options is with what I call a “mini calendar.” Here’s how it works.
In the old option trading days, a “calendar spread” meant buying an option — say with six months until expiration — then selling one-month options against it. The idea was to collect monthly premiums while owning some downside protection — all without ever having to buy the stock.
Doing a “calendar spread” is a solid strategy. However, there are two very important things to know or have in your favor, especially doing them the “old” way (with options that expire monthly).
No. 1 is … you need to have an edge when it comes to the stock’s direction. What’s going to make the stock go up after you get into your calendar setup? Having this edge, and having the stock move somewhat in the right direction, is the big difference between a successful calendar and a so-so calendar.
But No. 2 is even more important. In structuring a six-month calendar spread, that amount of time contains at least two wild-card events. Those would be the two quarterly earnings announcements where anything can be announced, pre-announced and otherwise reacted to — either positively or negatively!
But now, weekly options can give you an edge without worrying about whether a stock will move, and when, because you can re-evaluate — and, certainly, re-adjust — your strategy every week.
Here’s How a ‘Mini Calendar’ Can Pay Off Every Week
With weeklies, a “mini calendar” spread is now possible to do. This means that you can purchase a standard monthly option — one that may only be a month or two away from expiration — and then sell weekly options against it every single week for income.
In doing so, you could easily collect four to eight weekly premiums, depending on your time frame — instead of just one or two if you were using standard monthly options!
What I like to do is hunt down stocks that have a certain, future compelling event on the horizon, then craft a weekly option strategy around it to make money week in and week out — leading up to that event.
This event can be earnings (especially when you look back and see the stock having a history of running up in front of its earnings date) … it can be a big annual conference or trade show … it can even take place after the crowd has positively responded to a pre-announcement of better-than-expected earnings … or, that event can even be when a stock breaks out of a longtime, see-saw channel.
In other words, there’s no shortage of opportunities!
Structuring a trade around events like this wasn’t possible even 18 months ago. And when you add in all the volatility that’s priced into options these days — along with the phenomenon that one-week options have more juice priced into them — it’s a recipe for seeing your bottom-line grow. Best of all, you’ll still have the same traditional protections in place.
A Weekly Options Trade in Action: The Setup
With all that said, let me tell you about a recent trade I got into, putting the mini-calendar into the mix.
There’s an annual show in Las Vegas, the Consumer Electronics Show (CES). With the way our world has turned into a tablet/gadget economy … this show is the main spark for the newest, latest and greatest gadgets.
In fact, Wall Street sends armies of analysts and experts out to Sin City to report on almost every single presentation. CES takes place in January. On a side note, Apple doesn’t attend this annual show. Instead, they are busy putting on their own show called “MacWorld,” which is its own monster creation (and another opportunity to trade weekly options)!
While it’s impossible to know which gadgets and gizmos (and the companies behind them) will receive the most buzz from the CES — especially because we’re still a few months away from the next show — what IS certain is that all these new gizmos will need the latest and greatest chips to run on.
Not all stocks offer weekly options just yet, but the number is at around 50 and growing. And voila … two chip stocks just happen to have weekly options available to trade right now. So, I decided to trade Nvidia (NASDAQ:NVDA).
In the case of NVDA, the stock’s been shot to smithereens for most of 2011. But just recently it began a turn north. And I believe that between now and January, the stock could be a steady riser. Why? Because the Amazons (NASDAQ:AMZN) of the world are busy unveiling their new tablets, Google (NASDAQ:GOOG) is rumored to have a new one up its sleeve and, well, there’s likely to be more rumored about — and unveiled — at the CES show in Vegas in January.
All these things are key ingredients for a great mini-calendar trade. To make it work, you simply need to buy a January option, and then become a seller of volatile, weekly options between now and then.
I like to move as many odds into my favor as possible. And with the possibility of mini-calendars, compelling future events and the “math” of the new weeklies … this presents a compelling opportunity to make money!
Want to Set Up Your Own Weekly Option Trade?
The mini-calendar is great because you start with a long option that serves as protection/insurance. In the case of NVDA, we’re looking at buying January put options to implement the first part of this strategy. And then, you’ll sell (“Sell to Open”) puts against your long puts, week after week, collecting money upfront each and every time!
Here’s what a trade could look like:
For NVDA (currently trading around $14.80):
* Buy 10 of the NVDA $12 Puts for January
* Sell 10 of the NVDA $15 Puts for the upcoming expiration week
This is called a bull-put mini-calendar spread. If the stock steadily rises, stays the same, or even declines some … you make money.
Then you do it all over again, week, after week, after week.
That’s the simplified version. But remember this … THE MOST IMPORTANT thing about trading successfully is knowing which stocks to trade and when!
There are cool strategies, and weekly options are definitely cool. But unless you have an edge to trade, over and over again … making money will elude you.
If you’d like to find out about a little-known piece of news, one that makes a stock go higher 86% of the time — in the next three to six months — I’ll tell you all about it and then some.