An Even Faster Way to Make Money

Over time, options (no pun intended) available to option traders have increasingly expanded. In 2005 the Chicago Board Options Exchange (CBOE) introduced weekly options, opening a new door of opportunity.

Today, there are more than 500 stocks and exchange-traded funds (ETFs) for which you can trade weekly options.

Weekly options work the same way as traditional options. However, while traditional monthly options expire in the third week of a month, weekly options expire every week. If the exchange is closed on a Friday (e.g., a holiday), the weekly option will expire on that Thursday.

Honing in on an Event

The biggest advantage of weekly options is that they allow buyers to place a short-term bet that a certain event will cause a major move in the underlying stock.

For example, company XYZ is scheduled to report earnings next week, and the stock has rallied more than 20% in the past week. If you think the market’s too optimistic and you think the stock could drop a lot if the company provides disappointing forward guidance, you could buy out-of-the-money puts expiring next Friday.

If the stock doesn’t move enough in your favor, you could lose the entire premium you paid. However, if things do go in your favor, you could make a huge gain.

Although rare, overnight gains of 10,000%+ do happen. In dollar terms, this means $100 would turn into more than $10,000 overnight! If you happen to catch lightning in a bottle, you would make a lot of money in mere days.

Paying for Less Time

With a weekly option, since there isn’t much time left to expiration and time decay accelerates as expiration approaches, you don’t have to pay much for time value. On the other hand, if you buy an option that will expire in three months, you’re paying for three months of time value, which wouldn’t make sense if you are only interested in trying to get a quick gain from the earnings release.

Since you are only in a trade for a short amount of time, you can make more option trades. If you are good at what you do, you have the opportunity to make more money with weeklies.

From the Seller’s Perspective

On the other side of the trade, why would an option writer sell weekly options? One reason is that time decay is faster than a longer-dated option. Time decay accelerates the closer you are to expiration.

Also, since weekly options expire more frequently, you can sell more options in a year and collect premiums more frequently. So even though you collect a smaller premium each time you sell a weekly option, when you add up all the weekly premiums, it will likely be higher than the one premium you get for selling a traditional option.

A weekly-option seller who can consistently sell options that expire worthless will likely earn a higher return than an option seller who writes monthly options.

The drawback, of course, is that your potential downside is greater than the small premium you collect. If the stock moves against you, and you are un-hedged, you could be hurt very badly. To minimize the chances of a big move in the option, you could consider avoiding selling weekly options in companies that are scheduled to report earnings that week.

Some Drawbacks with Weeklies

Weekly options tend to be less liquid than monthlies, and the Bid/Ask spread could also be wider. As a result, if you need to close a position, it could be more difficult. More frequent trading also results in paying more commissions. Discount brokers don’t charge very much (e.g. Charles Schwab only charges $0.65 per contract), but over time, the cost could add up.

I’ve purposely kept the discussion simple. In practice, with experience you will be able to implement the same strategies as you would with traditional monthly options to manage. The difference is that with weekly options you can do it four times a month!

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