I am really excited to show you how weekly options can enhance your overall trading, which may add another valuable tool in your trading arsenal.
I’ll be walking you through the basics of weekly options. Once you understand the basics, I’ll show you the best strategies for using weekly options, backed by real trade case studies I have done in the past.
I’ll share with you my thoughts behind each trade, as well as, provide tips and resources for future trades.
Assuming that you already understand what an option is and how to execute a trade, we’ll move forward. After all, without a basic understanding of options, weekly options will not make sense.
Enough talk; let’s get started.
Weekly options are options that are listed to provide short term trading and hedging opportunities. Weekly options expire every week. For the most part, they are listed on Thursdays and expire the following Friday.
Weekly options have actually been around for some time, but investors only traded them on cash settled indices, such as the S&P 500 Index (SPX). Cash settled, simply, means that the option contract is fulfilled through the payment or receipt of dollars as opposed to the underlying shares of stock.
As of July 1, 2011, the Chicago Board of Options expanded the instruments that one can trade weekly options on. When weekly options first became available, there were only twenty-eight underlying stocks, ETFs, and indices that offered weekly options. Currently, the list has grown to over 800 offerings, and there will likely be more in the future.
To find an updated list of available weekly options, you can check out this link at the CBOE site anytime:
While there are not as many weekly option listings as the monthly contracts, you should have no problem with liquidity; as these tend to be some of the most popularly traded names in the stock market. The name “weeklys” is a trademarked term by the CBOE to represent weekly options.
You should be aware of the important differences between a monthly and weekly option. The most obvious is that weekly options expire each week on Friday. Monthly options expire on the Saturday, following the third Friday of the month. Weekly options expire Friday afternoon at the market close for underlying assets such as stocks and ETFs. The expiration for indices is actually at the close on Thursday with settlement on Friday morning. I know it is a little confusing, but we’ll primarily be focusing on stock and ETF options that expire on Friday at the market close.
As mentioned earlier, new weekly option contracts are available each Thursday morning and expire on the Friday of the following week. Therefore, weeklys have eight days to expiration, although, that is technically six market trading days.
Weekly option contracts will be marked differently than the monthly contracts. Here is a screen shot of how they look on my trading platform, thinkorswim:
Notice how weekly options are marked in red. Some brokers may show them differently.
There is one week each month when weekly options are not available. Weekly options are not listed when there is a normal monthly option expiration cycle (monthly options expire on the Saturday following the third Friday of each month). Technically, monthly options are the same as weekly options for the week in which they expire. In fact, they have the same characteristics as the weekly options during that week.
So what are the advantages that weekly options give you?
Here are a few major advantages:
These are some of the main advantages and disadvantages associated with trading weeklys. It is important to understand each of them before you consider trading them.
This section will break down what, I think, are the best strategies to use when trading weekly options and when to use them to set up a trade.
Mechanics of strategy: Buying to open a call contract
This is how it would look if you bought, to open, one weekly call option on the platform thinkorswim:
Strategy detail: We have a limited amount of time, so our timing has to be on point. Even though we are paying a cheaper price than the monthly option, we need to be right on things, such as, strike selection, price direction, and amount of time we need.
If we are wrong, we could be sitting on a worthless option. In most cases, you should prepare for the worst-case scenario. The worst-case scenario, here, means you should be looking at how much you are willing to risk, if the contract becomes worthless, and based on that, you should buy the amount of contracts that fit your risk profile for that trade.
Ideal Trade Situation: The only way to make money when you buy a call is when the underlying asset of that option goes higher, the implied volatility rises, or a combination of the two. However, the gain made from the stock price moving higher must overcome what you’ll be losing in time decay and potentially a drop in implied volatility.
I don’t believe a person should be buying a naked call option because it’s generally a low probability trade. If you have a bias in direction, I would consider using a debit spread or another structured trade.
Mechanics of strategy: Buying to open, a put contract.
This is how it would look if you bought, to open, one weekly put using the platform thinkorswim:
Strategy detail: This trade is going to be like buying a call, but instead of looking for the underlying asset to go higher, you are looking for the underlying asset to move lower, in order to make money. Basically the drop in price needs to overcome what we’ll be losing from the time decay and, potentially, from the drop in implied volatility.
Again, we will need to be right on things, such as, strike selection, price direction, and the amount of time we need. If we are wrong, then we could be sitting on a worthless option.
Using the same principle as above, when you buy a put, you should think about the worst-case scenario and base your trade size on the total amount of premium paid and the amount of risk you are willing to take.
Ideal Trade Situation: The main way to make money, if you buy a put, is when the underlying asset drops lower, implied volatility rises or a combination of the two. The ideal setup we are looking for when buying a weekly put option is when the stock is on the verge of breaking down lower. Being long a put is different than a call because as the market moves lower, implied volatility will likely increase.
I don’t believe a person should be buying a naked put because it’s generally a low probability trade. If you have a bias in direction, I would consider using a debit spread or some type of other structured trade.
Mechanics of strategy: Selling to open a call contract.
This is how it would look if you sold, to open, one weekly put using the platform thinkorswim:
Strategy detail: When we sell a call, we are looking to collect the premium of the call strike sold. Selling options can provide a high probability of success and create consistent returns over long periods. However, when you sell a call you define your max profit because you only collect what you sold the option for.
Ideal Trade Situation: When implied volatility is high in an underlying, that provides an opportunity to sell an option. When we sell only a call though, that is bit of a bearish to neutral trade. The outcome you are looking for is that the underlying asset price will not exceed the strike price at which you sold, by expiration. We collect the full premium, if that occurs. Because we are theoretically exposed to undefined losses, this will require extra margin. This is ideal for lower priced underlying stocks because they will not chew up your overall buying power.
By selling high implied volatility, we are also betting for the volatility to revert to the mean.
Mechanics of strategy: Selling to open a put contract.
This is how it would look if you sold, to open, one weekly put using the platform thinkorswim:
Strategy detail: When we sell a put, we are looking to keep the premium collected from the contract we sold. Many traders like this trade because it offers some advantages. When we sell a put, we are looking for the underlying asset to stay above the strike we sold, at expiration. As long as it does, we collect the full premium.
Ideal Trade Situation: When implied volatility is high in the underlying, that is the ideal situation to sell an option. When we only sell a put, this type trade is a bit of bullish to neutral. By selling high implied volatility, we are also betting that the volatility reverts to the mean. When implied volatility drops, the price of the options loses value, all else being equal.
Selling a put is the same risk profile as a covered call write. Selling a put though, is a better use of capital and provides an overall better return.
Selling a put is an inventive way to get long the stock. For example, by selling the put, you’re collecting a premium, if the stock stays above the strike at expiration, you’ve made money. However, if the stock trades below the strike and you don’t exit, you’ll be assigned the stock at lower level. For those who don’t mind owning the stock, this approach might be better than buying stock outright.
The only downside to the trade is that you have to be willing to own shares, which would require the full amount of capital to own the stock.
Just like selling a call, this trade requires margin and I generally prefer selling a put spread to define my risk on higher priced underlying stocks.
Mechanics of strategy: Buying one option and selling another which is further OTM, in the same expiration period. This is always done for a debit.
This is how it would look if we bought, to open, a weekly call and a weekly put spread using the platform thinkorswim:
Strategy detail: Similar to buying a call or put, this strategy is playing for a directional move. The major advantage with using a spread is that we are able to reduce our cost basis. This will help increase our probability of success by bringing our break-even points closer. When you buy an option or spread for a directional play, timing plays a critical role.
Ideal Trade Situation: Anytime you are bias on a direction you should use a spread to reduces your cost and break-even points. When implied volatility is elevated, it’s critical that you use the spread in case it comes back in. By selling an option, against your long option, it will reduce the role of implied volatility. It is ideal to do a debit spread near where current prices are at and try for a 1:1 risk-reward trade. This means you risk $1 to make $1 to create a higher chance of success if you’re right on the direction.
Mechanics of strategy: Selling one option and buying a further OTM option, in the same expiration period. This is always done for a credit.
This is how it would look if we sold, to open, a weekly call and put spread using the platform thinkorswim:
Strategy detail: A seller of a call or put spread has a better probability than being a buyer of one. By being a seller of a spread, we have defined risk and reward. By selling a spread, we are looking to keep the amount of premium from the sale.
Ideal Trade Situation: The trade thesis here is that by selling a put spread, we are looking for the underlying asset price to expire at or higher than the strike, we sold. Unlike selling a put, we define our max risk and are not exposed to unlimited risk to the upside or downside.
If we sell a call spread we are looking for the underlying asset price to expire at or below the strike, we sold. Unlike selling a call, we define our max risk and are not exposed to unlimited risk to the upside or downside.
We need to make sure that, in the spread we sold, the underlying price does not start to exceed the total premium collected, which is our break-even point.
Here is an example: Priceline.com (PCLN) is currently trading at $1056.64. If we think PCLN will close at $1090 or below, three days from now, we would look to sell the November $1090/$1095 call spread for around $.35, if we used the mid prices of the two option strikes.
Therefore, we are risking $4.65 to collect $.35. While you may think it sounds like a bad risk/reward, we base this trade on probability. When you buy a call or put, we have time working against us. In this case, time is on our side.
If we were to do this trade with three days to expiration, we would need prices to close above $1090.35 on that Friday’s expiration, in order to start losing money. We calculate this by taking the strike price we are short and adding the premium collected to that strike price ($1090 + $.35 premium = $1090.35). That $1090 strike has a 90% probability of expiring OTM in the next three days.
While this trade has a high probability of success, the duration on these trades are very short and have high gamma risk. These type of positions are vulnerable to randomness. That is why these positions will need management that is more active. It’s also important to sell spreads on an underlying when implied volatility is elevated and not just sell spreads randomly because you like the amount of premium collected.
*Note, if the sold spread is in-the-money by one cent, we will need to close it before the market close on expiration Friday or we’ll be assigned.
Mechanics of strategy: The strategy consists of a debit spread and credit spread, done simultaneously. This can be done with calls as well as with puts.
To open this trade, this is what it would like in the platform:
Strategy detail: I like to use this strategy as a directional play after an underlying has made an extended move, typically for a credit. However, this trade is ideal when implied volatility is elevated. The body of the butterfly is short two strikes and would benefit from implied volatility decreasing and the underlying staying near the short strikes. We can buy or sell a butterfly spread; however, I prefer buying them for close to zero cost or a small debit. Ideally, we’re looking for prices to move to a certain strike around expiration. We can do this by using calls or puts; it just depends on the direction we think the underlying asset is going to move.
Tip: I like using this strategy going into an earnings announcement. If we can collect a credit, then we can still make money if we are wrong on direction or if it does not move as far as we anticipated. The best way to get a credit, typically, is by moving the higher leg of the body up one more strike to create a broken wing butterfly. A butterfly which is not balanced, meaning, one side has more risk than the other does.
Ideal Trade Situation: When we use this strategy, we are looking for the underlying asset price to move in a certain direction, and to expire at the short strike. The short strike would be the body of the butterfly. Of course, if the stock options have high implied volatility, it tends to boost the risk/reward.
The first wing is the strike we would be buying to play in the direction of where we think the underlying price will move. If you are familiar with ratio spreads, it would be buying one option contract and selling two option contracts higher or lower than the strike, you are long.
The second wing, to complete the trade, is to define our risk on the position. It also benefits because it lowers the amount of margin required.
This trade may seem a little complicated at first, so let’s look at an example of a regular butterfly spread.
Let’s say, in the next three days, we think the SPDR S&P 500 Trust ETF (SPY) will continue to move higher, but think it will close around $210. Current prices are trading at $206.54.
Instead of paying 7 cents for the $210 calls, we can put on a butterfly for a less expensive play and a wider profit area.
To open this strategy, we are buying the $209.50 & 210.50 strikes while selling two of the $210 strikes. This might be confusing, but if you break the strikes down, it’s a credit call spread with a debit call spread.
Most platforms allow you to place this trade as one single order. Which is great because it reduces the potential of slippage.
If prices close at $210 we would make $47 on our $4 investment.
If we are wrong, then our max loss is $4.
*Butterfly trades typically have a longer hold time because you need to wait for the short strikes to fully decay in order to see profits. If we put this trade on for 4 cents, we would look to close out some or all at 8 cents.
Mechanics of strategy: Selling an OTM call spread and OTM put spread to collect a premium.
To open this trade, this is what it would like in the thinkorswim platform:
Strategy detail: This strategy is one of the most popular neutral option strategies around amongst retail traders. The trader is expecting the underlying asset price to stay in the range and settle in between the short strikes.
Ideal Trade Situation: Whenever we sell options, high implied volatility is critical. When we put on an Iron Condor, we are looking for the underlying asset to trade in a range. Basically, we’re looking to take advantage of rich options and profit from the implied volatility collapsing or the underlying stock trading in a range or chop around.
The beauty behind this trade is that it is limited risk in nature. Since time is working in our favor, this is typically a high probability trade.
Mechanics of strategy: Selling a near term call and put, whilst buying the same strike (as the call and put sold in a further expiration contract).
Here’s how the trade would look:
Strategy detail: Double calendar spreads have been my favorite, when trading around a stock earnings event. The type of strategy benefits from time decay and the collapse of implied volatility. The idea is that the short options lose more of their value than the long options in the later expiration do.
This trade is usually completed for a debit.
The reason why this type of trade is useful is because when a big event is about to occur, such as when a company is set to release earnings, implied volatility rises due to the uncertainty of the outcome. They generally over price the options, going into the event. Based on volatility, the price of the option is the richest in the nearest term contract.
Here is an example of how the implied volatility in the shorter-term options is more expensive. This is BAIDU (BIDU) on February 10, 2015 going into earnings on February 11, 2015:
Notice how the near term, same strike options have an implied volatility of 67% compared to 45% in the next series of options, which are the monthly contracts.
After the event happens, the uncertainty disappears and options volatility naturally drops. That is why even if the stock experiences volatility, it might not overcome the decrease in option volatility.
If this occurs, the near term contract lose value faster than the options we are long. Essentially, we can profit on the difference on the spread bought before earnings and sold after the event.
This trade becomes profitable with a move in either direction. Whichever way it moves, one side will start creating profit and offset the cost for the other side of the trade, which will usually expire worthless. Just as long as the stock move (delta) is not greater than the implied volatility collapse.
Ideal Trade Situation: We should use this type of strategy when we are not sure of the directional movement of the underlying and believe there is a distortion between near term volatility and the next term’s implied volatility.
Again, we are only looking for the underlying asset to move to the strike that we sold. If the move is too far beyond the strike price, we will start to lose money. Therefore, strike selection is very critical. Generally, we want to pick our strike based on the implied move, along with using support and resistance levels. When we trade this type of strategy, we are playing for a specific event and intend on exiting right after that event.
Tip: To figure out the priced in move (or implied move) just take the price of the at-the-money straddle and divide that by the current price of stock. Taking BAIDU (BIDU) as our example, prices closed at $219.44 and the $220 straddle was priced at $11.73, so 11.73/220=5.3%
Mechanics of strategy: Sell near term option while simultaneously buying further dated option at the same strike and option contract type (i.e. Call).
Strategy detail: This is very similar to the double calendar spread. The only difference is that we are only playing for one side of the spread, and by doing that, we are betting on the direction that we believe the underlying asset price will be going.
Ideal Trade Situation: If I have a bias on the direction of a stock, ahead of the event, I might look to play it with a calendar.
I can look to sell the current weekly option and buy the further dated option. The trade is profitable if there is a move in that direction and the difference in the spread widens. Ideally, I’d like the short option to lose more of its value than my long option.
The only issue with this trade would be if I am wrong on the direction and prices move the other way, aggressively. Then, I would be in a losing trade. The trade could recover since I am still long the further dated option, but that is not the thesis behind the trade and I’d be closing out for a loss vs. crossing my fingers and hoping for a comeback.
If I had a directional bias on the underlying asset price over a period of time, I could buy a longer dated option and use the weekly option to sell the same strike against it. This way, I can be long or short the underlying asset with the longer dated option, but continue to sell the weekly and use the profits collected to reduce my cost basis.
In many cases, this creates a zero cost trade. The only issue would be if we sold the weekly options and prices were to expire above the strike sold, then we would need to close out the short and long spread. However, we would look to re-open it that following trading day.
This strategy has been one of the more interesting ones with the introduction of weekly options.
Mechanics of strategy: Sell near term expiration option while simultaneously buying further dated option at different strike, but different option contract type (i.e. Call).
Strategy detail: This is very similar to the calendar spread. The only difference is that you are not using the same strike prices.
Ideal Trade Situation: I would use this strategy for a few different reasons.
If I have a directional bias going into an event, then I would normally play it with a calendar spread. But if my thesis is that prices will continue to move in that direction, I will look to sell the weekly option and be long the further dated option.
My trade will be profitable if there is a move in that direction, also if there is a difference in the spread after the event.
I would then look to continue to stay long the longer dated option and continue to sell the weekly option against it to create more profits or to reduce my cost basis.
The only issue with this trade would be if I am wrong on the direction and the price moves the other way, aggressively. If that happens, or if prices move in my direction farther than I expected, then I would be in a losing trade.
Let’s say, I have a directional bias, for a period of time, then I would buy a longer dated option and use the weekly option to sell the same strike against it. This way I would be long or short the underlying asset with the longer dated option, but continue to sell the weekly options against it to reduce my cost.
The difference between this strategy and the calendar is the cost to open the trade. The diagonal could be cheaper in cost because of the strikes chosen. For instance, you can sell the near term options and then buy a longer term option that is a strike higher than the nearer term contract sold. The difference with the calendar and diagonal is that the diagonal does carry a little more risk between the strikes. That is the reason why it’s cheaper.
In this section, I will go over a few trades that I executed using weekly options along with the thought process behind each trade.
Date: 10 /14/2010
Strategy Used: Double Calendar Spread
Trading Event: Earnings
Closing Price before Earnings: $540.93
Closing Price after Earnings: $601.45
Time In Trade: 1 day
Cost of Trade: $1.00
Return: 500% closed call calendar side trade at $5.00 minus commissions
Google was due to release earnings after the close. After looking at the order flow, I was not able to see a clear bias. I knew prices would move because (GOOG) is normally a big mover. Since I was not able to detect a bias, I went with the double calendar spread.
I picked my strike for the trade by adding the priced-in move to each side and studied the daily chart, which is highlighted in yellow below. The priced-in move of $22 in either direction is from the example above of the double calendar spread.
From there, I looked at prices to see how far outside the range they could move. I recalled what happened to (GOOG) last earnings and figured that it had more upside than downside. Looking at the upper end of prices, I saw that there was a gap to fill and that the $590 level would likely present a big resistance level.
You might be wondering why my strike selections were so far out. The reason is that I was expecting share prices to move. The further I go out-of-the-money, the cheaper the trade is. Since I was looking for a move, my job was to see how far they might move and to pick the right strikes. As I mentioned, I used what the market had priced-in and I charted what the move would look like using support and resistance levels.
The reason I sold the options with one day to expiration, against the weekly options, was that I was just looking for an overnight trade, and they had the highest amount of implied volatility. Using the weekly option reduced my cost, which was more attractive than the monthly. The monthly options, I sold, had one day to trade while the weekly options had eight days.
This trade was successful because we had a larger than expected implied move of 60 points higher. The put side of the trade was worthless and the $590 calls, that I sold, expired the next day went in-the-money with less extrinsic value, compared to the $590 calls I was long that were in-the-money and had extrinsic value.
Here is what the trade structure looks like:
Strategy Used: Iron Condor
Trading Event: None
Closing Price on Entered Trade: $113.05
Closing Price at Expiration: $114.82
Time in Trade: 7 Days
Cost of Trade: credit of $0.50
Return: 100% or the total premium sold less commission.
The market was slowly grinding higher after just seeing an aggressive move off the recent lows of about eight points. My thesis was that the upside was limited during the next seven days and there was more of a chance for a pull back. Likely, there would be buyers of the dip.
That is why I went with the short $110/$108 put spread and short $115/$117 call spread, also known as an iron condor. I was putting myself at risk of losing $1.50 to make .50 cents, but it was more of a probability trade, that we would continue to trade in a range. As you can see, that is exactly what happened.
Here is what the trade structure looked like:
Strategy Used: Calendar Spread
Trading Event: Earnings
Closing Price before Earnings: $251.89
Closing Price after Earnings: $254.24
Time in Trade: 1 day
Cost of Trade: $3.51
Return: 50% closed spread at $5.00
Shares of (AAPL) had been trading upward and there was a lot of hype around the stock. Looking at the chart, I saw a slight bullish triangle forming. However, looking at current resistance levels, I thought there would be some selling at that level due to the uncertainty in the general market. At the time, a lot of focus was centered on the BP oil spill.
Looking at the option order flow, I felt that there was enough of a bullish bias leaning into earnings to warrant a bullish trade. I went with the $270 strike and followed what the market was pricing in for an expected move. Shares moved higher and ended up closing up $3 on the day.
Here is what the trade looked like at entry:
Here is what the trade looked like on exiting:
Here are some tips that will help you when you approach trading weekly options:
1) You should always use limit orders on your trades. Market makers are not going to fill you at great prices on wide markets when you do not use a limit order, you’ll get chopped up in slippage. Also, many of the strategies mentioned are “multi-leg”, however, most platforms allow you to place limit orders on these trades as one single order. In many cases, this is much better than trying to trade each option individually.
2) We only discussed strategies in this book with max profits. It’s important that you manage your profits early. The ideal area is 50% of the premium collected. The more premium you take in, the higher chance of coming out on top.
3) When I trade options with companies reporting earnings, I only risk 1% of my portfolio. That means on a $10,000 portfolio I only risk $100 in a trade. Even if that means I can only purchase one contract, I am fine with that.
4) When trading weekly options, time and price are of utmost importance. Unlike stocks, there is a ticking clock associated with options, because they are wasting assets. You must be certain on your timing and strike selection.
5) In order to be successful, trading options, you need to put in the time and effort. So take it slowly, understand the strategies you have learned and in which situations they work.
You should trade very small in the beginning, while you’re gaining valuable experience.
Now that you’ve seen how effective some of these weekly options strategies can be…it’s time to step up your trading to the next level…I want to show you how I’ve used weekly options to my advantage and how you can use two trading strategies to improve your trading.
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