Option trading has become very popular over the last five years.
Options are based off of time and price. So if you are trading IWM (iShares Russell 2000 ETF) and you believe it is going to head higher, you could buy the call options. There are different time frames one has to choose from, weekly or monthly options and the more time you buy, they more expensive that call option will cost you.
The Trade Off
The less time you buy the less you will pay. But, you will also be taking on much more risk. If IWM is trading at 108 and you buy the weekly options on Monday and they expire that Friday-with a 110 strike price, IWM would have to be trading above that 110 strike price by that Friday or you will lose everything you put into that trade.
Now the options can move higher in value if IWM moves up right after you bought them, but the closer to the expiration date you get, the value of that option will move lower-as they will be worthless if not above your strike price by the expiration date.
I like to use weekly options, but I will use call/put options that expire at least two weeks out, so it gives me a little time. I will very rarely hold them for more than a week and when I have nice gains, will just sell them and move on to the next trade.
Trading weekly options is risky, but if you look for $500-$700 gains per trade and not look for the home run trades, you can do very well. Here are a few tips on trading weekly options. Don’t overstay your welcome. If you have some nice profits-take them and wait for the next trade set up.
Time Value
Always buy at least two weeks’ time for the options. The closer to the expiration date, the more the value of that option will deteriorate. To learn more about trading options and more tips click here.
