Many investors and traders believe options to be very risky and weeklies to be even more risky. I do not agree.
I believe options are neutral. They are simply tools that can be used to express trades. Options can actually control risk and position sizing if they are used in the right way. Of course, the dangers are there if they are used for gambling or ‘Hail Mary’ type trades.
Weekly options can be imbedded into existing trading methods with the right position sizing and risk per trade to enhance performance. The main key is to trade your size. If you are trying to capture intrinsic value on Apple in-the-money- options trade the same size you would with stock, if you trade 100 shares of Apple then trade one Apple contract. If you are playing for Gamma with out-of-the-money options then risk the same per trade as you would with stock. If $500 is the most you can risk per trade with stock then buy little more than $500 of options when you play for Gamma. If you want to be aggressive and buy $1,000 worth of out of the money options then you would have to cut your losses at 50%.
The key is to use weekly options responsibly. We still have to manage risk. We still have to have the right position sizing. Above all we must have the discipline to stay within the rules of or trading plan and stick to our method.
Here are the ten reasons I like to trade weekly options:
1. Weekly options provide asymmetric trades with a built in loss at the contract size but an unlimited profit potential that can grow with the underlying equity that it is based on.
2. Weekly options allow us to own the move of 100 shares of our favorite stock for a few thousand dollars instead of tens of thousands of dollars that the stock actually costs by playing in-the-money options for maximum delta and capturing intrinsic value.
3. Out-of-the-money weekly options allow us the opportunity to capture triple digit gains on our capital at risk in a short period of time by playing for gamma.
4. Playing long option strangles on weekly options allows us to capture short dramatic moves on the stock in either direction and we do not have to know which way it will move. This is a very cheap play compared to using monthly options.
5. I have always liked weeklies better than monthlies because it is more difficult to overcome time premium in the monthlies to get to the delta capture and intrinsic value. Weeklies are short and to the point you can get in-the-money and start capturing delta and intrinsic value the same day you buy them.
6. Most weekly options provide wonderful liquidity around the at-the -money strike prices. Unlike many monthly options that cost you several percent to get in and out of due to light volume, the majority of weeklies have a tight bid/ask spread.
7. For those inclined to write options the weeklies give you the chance to write very high probability bets each week with the far out-of-the-money options. Especially on the famous Apple ‘pin’ Friday where the price tends to stay put and all the out-of-the-money options have the life span of fruit flies.
8. Weekly option puts are excellent and cheap hedges to cover other positions like long term holdings of a long stock in an investment account.
9. I like to express trend following trades with weekly options by rolling the options week to week to express a longer term positions I want to hold. I can use in-the-money-options for aggressive delta capture or out-of the-money options for larger position sizing and very aggressive gamma capture.
10. Weekly options allow smaller traders to manage position sizing better than with stocks or regular monthly options. With an understanding of the option Greeks they are very powerful tools for risk management and position sizing.
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Do you use weekly options? We’d love to hear about your experiences. Or, do you have any questions on how weekly options work? Post them below for Steve Burns.
