Learn How to Make Money with Weekly Options

Find out what you need to know before trading weekly stock options

Mar 7, 2017 at 11:16 AM
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    Weekly options expire on Fridays outside of the traditional monthly expiration week (normally the third Friday of each month). Weekly stock options are available on a wide variety of popular stocks, which essentially means that every week is now an expiration week. As a result, it's possible to be stingy about how much time value you're buying, since you can fine-tune the time frame of your trades to line up almost exactly with your forecast for the stock's expected move.

    To make the most of your weekly option trades, keep reading for our top 5 tips -- plus, a word about making the most of an option's convexity.

    1. Weekly option buyers should avoid sluggish stocks

    By definition, a weekly option is a short-term play, with available listed series ranging only as far out as five or six weeks. Since the underlying stock doesn't have much time to make a favorable move in your direction, it pays to buy weekly calls and puts on names that have a history of big, dramatic price swings. In other words, this isn't the format to initiate a conservative bullish play on a slowly trending blue chip -- you want a fast, aggressive move in the right direction.  

    An exception to this rule would be a situation where you believe an otherwise slow-trending stock has reason to make a bigger-than-usual move, and the market is not pricing this potential volatility into the option's price. A sector peer reporting earnings, or an industry conference at which the company or a peer company is scheduled to present, are examples of such situations.  

    That said, weekly options aren't just for buyers. Slowly trending or range-bound stocks might actually be ideal candidates for those looking to sell calls and write puts, so it pays to keep an open mind.

    2. Wait for the right trading setup

    Weekly options offer plenty of advantages, but they aren't necessarily all-purpose trading vehicles. This is especially true now that many exchanges offer up to five consecutive series of weekly options at a time -- which means it's possible to buy a weekly option with more embedded time value than its traditional monthly counterpart.

    Before initiating a weekly option play, be sure it's the right tool for the job. If you're predicting a gradual uptrend -- the kind that may include the occasional pullback or period of consolidation -- you'd likely be better served by purchasing at least a few months' worth of time value for the trade to develop. On the other hand, if you expect a drastic spike higher over the span of just a few days, that's exactly the type of scenario for which weekly options were made.

    3. Identify a catalyst to spark a big stock move

    There are a few different types of indicators that might help to signal a big impending move in the underlying shares. For example, upcoming events -- such as a product launch or quarterly earnings report -- have been known to trigger explosive price action in stocks.

    On the charts, keep an eye out for historically volatile stocks that have recently endured a period of conspicuous consolidation, since this could indicate that another massive move is due in the near future. Tightly pinched Bollinger Bands and the symmetrical triangle pattern are two technical indicators that can offer valuable clues on this front.

    Meanwhile, from a sentiment perspective, it's always encouraging to see a healthy supply of short interest. Short-squeeze rallies can result in major upside moves in a very brief period of time, presenting an ideal setup for the weekly option trader. Moreover, bears who are already in a winning position on their shorts may grow even bolder as highly shorted, technically weak stocks rally into resistance levels -- setting up a potentially ideal short-term put-buying opportunity.

    4. Focus on liquid stocks with narrow bid/ask spreads

    This is a relatively easy rule to follow for weekly option traders, since these short-term contracts are generally listed only on names that have already attracted a wide following among traders. When a stock's options generate a respectably heavy amount of volume each day, the bid/ask spreads tend to be narrow -- that is, there's not that great a difference between the lowest price a seller is willing to accept for a security and the highest price a buyer is willing to pay.

    There are two major benefits to trading liquid options with narrow bid/ask spreads. First, it helps to ensure your ease of entry and exit on the position, since there's a healthy built-in demand for the contracts. Second, you've effectively reduced the ill effects of "slippage" -- which simply refers to the fact that traders buy at the ask price and sell at the (lower) bid price. The smaller the difference between the bid and ask prices at the outset of the trade, the less you'll have to worry about slippage impacting your profits.

    As a word of caution, we have occasionally noticed that even when a stock has a narrow bid/ask spread on its standard options, the weekly options might still have widely spread pricing. If you see this, we encourage you to try to "work" the order by placing a limit order to enter the trade between the bid and ask prices to improve the odds of a quality fill.  Or, if you are trying to exit a position on an in-the-money option with a wide bid/ask spread (whether on a weekly or standard option), attempt to get at least intrinsic value for the option, as sometimes the bid price might actually be below its intrinsic value.

    5. Take advantage of affordable hedging opportunities

    Since weekly options often carry less time value than their monthly counterparts, they offer an economical way to hedge your stock positions against event-related risk using the "protective put" strategy. If you're holding shares of a company that's due to report quarterly earnings early in the month, buying the corresponding weekly put option could be cheaper than shelling out for the extra few weeks of time value baked into the cost of a front-month put.

    Of course, since scheduled events can push implied volatility higher across the board, it always makes sense to compare volatility levels before committing to any option-buying strategy. All other things being equal, though, a shorter-term option will generally be cheaper than longer-term alternatives. And when you're buying put options to hedge -- which means you're generally hoping the contracts expire worthless -- it makes sense to minimize the amount of capital you're committing to the trade.

    How convexity works with weekly options

    One of the benefits of buying options is convexity. When a stock drops one point, a call option with an initial delta of 50% will lose a half-point. But the call option will now have a lower delta, which means the next one-point drop in the stock will result in a correspondingly smaller loss for the option.

    This "positive curvature" reduces an option holder's price risk on each successive decline in the underlying shares. By contrast, a stockholder would continue to lose the same one point on each successive drop in the stock.

    Convexity works in the same beneficial manner as the stock moves higher. A call option's delta will increase on each successive rise in the shares, which means the call holder enjoys increasingly larger gains as the trend higher continues.

    Since weekly options have relatively little embedded time value, they're a great vehicle for taking full advantage of convexity.  If the stock's price changes dramatically in your favor within the time frame of your trade, you stand to benefit greatly from the directional move, while minimizing the total dollar amount you risk losing to the inevitable impact of time decay.  

    Ready to start trading? Learn more about Schaeffer's Weekly Options Trader, Weekly Options Countdown, and Weekly Volatility Trader option trading services.



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