Trading options around expiration use to be an opportunity that only arrived once a month. Now, it comes every week. For the majority of their existence stock options were listed on a monthly basis with expiration landing on the third Saturday. That all changed a few years back when the wizards at CBOE created Weekly options. These revolutionary products afford investors the ability to trade around expiration every single week.
Weekly options have multiplied the number of vehicles available to trade on the most popular stocks and, perhaps more importantly, has ushered in a new era of opportunity.
Let’s highlight how you can use weekly options to both supercharge gains and trade more efficiently around market events like earnings or Federal Reserve announcements.
One of the most obvious benefits of weekly options trading is the increased frequency that traders can sell options near expiration. Take the covered call for example. Remember, the covered call consists of selling call options against a stock position. The premium received from the short call provides income as well as a modicum of downside protection for your long stock. Conventionally, investors would sell one call option each month for every 100 shares of stock owned.
With the advent of weekly options, however, covered calls can now be sold on a weekly basis. And since options lose value at a faster rate near expiration selling four weekly options generates more income than selling one monthly option.
Let’s look at a lesson plan I put together back in December:
Suppose you own 100 shares of Apple Inc. (NASDAQ:AAPL) and are willing to cap your upside profit potential in exchange for scoring some income. With AAPL trading at $122 (at the time of this writing) you could sell the one month Dec 122 call for $2.75. By bringing in $2.75 of premium the monthly Dec 122 call offers 2.3% of income over the next 30 days.
Since AAPL has weekly options available, however, we could look to sell four weekly call options over the next month instead. Right now you could sell the one week Dec 122 call for $1.30. By bringing in $1.30 of premium the weekly 122 call offers 1.1% of income for the next seven days. If every seven days you scored a 1.1% return by selling weekly options you would rack up a 4.4% return by the end of the month.
In sum, selling the one month call delivered a 2.3% return while selling four weekly call options over the same time frame delivered a 4.4% return.
Such an acceleration of gains would also apply to the naked put or any option selling strategy for that matter. To be fair, the wielding of weekly options will raise trading costs like commission due to the increased frequency of trading.
Additionally, since you’re receiving less premium up front when using weekly options versus monthly options you have less margin for error.
Essentially, weekly options trading is a more aggressive approach.
Now, consider how weekly options trading can increase trade efficiency.
Let’s say there’s a Fed announcement coming down the pike tomorrow and you’re looking to buy some protection just in case Janet Yellen throws a curveball and panic ensues. In the pre-weekly options era, you would have had to have purchased a one-month put option to protect yourself. Since the put option included an entire month of time, it would be somewhat pricey. After all, you’re only looking to own the put for a day or two to protect against any kind of post-Fed meeting fallout.
Wouldn’t it be nice if you could just buy a one-week put since that’s the time frame in which you need the protection? Well, now you can thanks to weekly options.
Here’s an example:
With the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) at $236.44 (at the time of this writing) it would cost $2.60 to buy a one-month $236.50 put option. If all you’re looking for is one week of protection, why not just buy the weekly SPY $236.50 put option for a mere $1? It offers protection over the time frame desired and is quite a bit cheaper.
That’s efficiency at work and yet another advantage of weekly options trading.
For an up to date list of weekly options available to trade, head on over to CBOE’s product page.
