Trading weekly options decreases your exposure to time decay and maximizes leverage
Weekly options are short-term option contracts that allow traders to profit from quick moves in the underlying stock. When weekly options were first introduced, there were only four index-based options to choose from. Now, there are a wide variety of weeklies available to trade on popular stocks and exchange-traded funds (ETFs).
How to Use Weekly Options
Weekly options can be used the same way you would utilize a traditional monthly option -- except expiration dates are available every week of the year, instead of just 12 times a year. There are many reasons to add weekly options to your repertoire, including the ability to capitalize on short-term moves, minimize the effects of time decay, and hedge event-related risk.
3 Reasons to Trade Weekly Options
Thanks to weekly options, the most popular stocks and ETFs now have options expiring every Friday -- which means you can fine-tune your trading time frame for maximum precision. There are three primary ways traders can take advantage of 52 expiration weeks a year:
- Maximize leverage on short-term directional moves. Buying calls and puts to speculate on a very short-term directional move with weeklies affords the option holder increased leverage, as well as decreased exposure to time decay, relative to longer-term options.
- Affordably hedge event-related risk. Weekly options can be used to implement a "protective put" strategy on stocks and ETFs, which helps you limit losses on your shares when there's concern about downside risk stemming from a specific, known event on the calendar (such as a quarterly earnings report) -- without shelling out the higher time value for a longer-term put option.
- Implement premium-selling strategies over shorter time frames. Selling weekly puts and calls over a time frame of days allows traders to capitalize on expected levels of technical or options-related support and resistance -- or to profit from over-inflated implied volatility -- while giving the underlying stock less time to move against you.