Weekly Options

Weekly options or "Weeklys" have rapidly grown in popularity since they began to be offered on individual stocks and exchange traded funds in 2010. Originally weekly options were only offered on the S&P 500 (SPX) and S&P 100 index (OEX) but the Chicago Board of Options (CBOE) started rolling out new offerings on specific index ETF's and well known stocks.

weekly pill organizer

Many stock investors are still only familiar with the traditional monthlies that expires each month so they are missing out the benefits that weeklies can provide to a portfolio. Lets discuss some of the key aspects.

WEEKLY

Each week the CBOE releases a new list of weekly options offered but the majority of the list stays the same. They are issued each Thursday and expire the following Friday. The only exception is that there are no new weeklies offered for expiration on the third Friday of each month as that is when monthlies expire.

Time Decay

The key advantage of weekly options is the rapid time decay. If you are option income trader or investor then you can now sell options every week instead of once a month to collect rapid time decay.

Traditionally, time decay on monthly options didn't really pick up until expiration week so the advantage with weeklys is that you boost your returns vs. monthlies. The general rule of thumb is that you can collect about two times the premium selling each week vs. one monthly.

If you a directional trader looking to make a short term trade with a long options then a weekly allows you to purchase an in the money options with little time premium priced in vs. a longer term monthly would carry more time premium. The shorter time to expiration means you don't need to buy as far in the money options with a weekly as you would with a monthly option to get the same move in the option that you own. This is because the delta will be higher on the weekly vs. monthly for the same respective strike price.

Weekly Options Strategies

Generally the most popular strategies with weeklys are income strategies that have traditionally been popular with monthly options like vertical credit spreads, covered calls, and calendar spreads. All of these strategies involve being short an option with the intent of having the short option expire out of the money and collect the premiums.

Option Risk

The biggest risk with a weekly is if you implement a trade that involves selling an out of the money call or put is that in order to collect a reasonable premium you will have to sell closer to the market strike prices. This is due to the fact that with the short time horizon, the underlying stock has less chance of making a large move. Therefore farther out of the money options contract have a higher likelihood of expiring worthless.

Overall, weekly options can provide a huge benefit to option income traders whether they are traders or long term investors but you must first have a good understanding of options strategies and risk/reward before investing in them.

Weekly Options

WEEKLY

Covered Call Writing Update: Weekly Options Make Every Friday Payday!

There is a new gold rush for covered call writers called weekly options, or "Weeklys." (Yes this is spelled correctly because the Chicago Board Options Exchange (CBOE) trademarked the name.)

weekly academic planner

Weeklys have been around since 2005 and have hardly been noticed because the option offerings were limited to the S&P 500 (SPX) and the S&P100 (OEX). In June of 2010, Weeklys were offered on the SPY, QQQQ, DIA and IWM, and in July 2010 the offerings were extended to equities and ETFs. Stocks like Apple, Amazon, Netflix, Microsoft, Intel, Cisco, Research in Motion, IBM, Goldman Sachs and Bank of America, and more are now available. Las Vegas Sands is the newest addition.

WEEKLY

In addition, there are some solid ETFs like the QQQQs (NASDAQ), GLD and GDX (Gold), SLV (Silver), USO (Oil) and FAS (3x bull), to name a few. There are about 30 at the moment and growing. However, the list can change weekly because each option exchange is allowed 5 picks per week to add to the Weekly list. If for some reason an exchange is not getting the volume, they can choose another stock. Recently, BIDU disappeared from the list.

Weeklys come out every Thursday and expire the following Friday. There are no new Weeklys in the final week where the monthly options expire. You can just write the next week from the monthly list.

Why Weeklys Explode Covered Call Writing Profits

Write Four Times a Month

Selling call options four times a month versus once is a pure gift. With option volatility at the moment, the premiums are fat and an experienced covered call writer can earn A LOT more premium. Doubling the monthlies in many cases is not unreasonable. That's like your boss calling you into their office and telling you they are doubling your salary and will now pay you every Friday! Nice. Also, if you use a long-dated put for protection, this "insurance" can be paid for very fast due to more writes per month.

Forecast Over Eight Days Instead of Thirty

Setting your crystal ball to look out 8 days versus 30 is easier. As traders know, the trend is your friend and it's much easier to look at what is happening in the week ahead. One of the biggest complaints about covered call writing is what to do if the stock really runs up and you have to either forgo the increased gains over the call option strike you sold or buy back the call at a higher price. If this happens, it's a lot easier to adjust over one week and reset with a new trend the next week.

Time Decay is Your Best Buddy

All call writers love and bank on time decay. With Weeklys, time decay is greatly accelerated. There have been times that calls I sold on Thursday morning on introduction eroded over 30% by Monday's close. I love weekends now more than ever! You can write near-the-money calls or at-the-money-calls and collect the higher premiums due to the rapid time decay.

Skip Earnings Week - Finally

How many times have you crossed your legs and held your nose during earnings week? Well, now you can just sit it out. Weeklys offer the maximum in flexibility. You can also trade the news that week before or after the event. Again, you can be in or out of the market weekly. THAT is flexible.

Super Size Premiums by Selling Weekly Puts

How much fun is this? Your stock's trend is solid, you have a buy / write for the next week and the money is in your account. Weeklys offer an astonishing opportunity to super size returns by selling a naked put or a put spread (to limit risk and to use less margin) for more premium. Just follow normal put selling rules; sell below a strong support point, at least one strike out of the money and maybe more if the premiums are good.

Choosing the put strike depends on your threshold of risk. Most put writers sell the puts in hopes that they actually can get the stock "put" to them, meaning they get to buy the stock at the lower price. That's a profitable way to get discounts on stocks you want to own anyway. Either outcome can be fine. One way you get to keep the premium and the other is you buy one of your core holdings on sale.

If you do not want the stock, just buy back the put. Another value is you do not need to own the underlying stock to sell puts, so you can sell more contracts to collect more premium. Just be sure you have the margin if the put is naked (each brokerage has different margin requirements, for each stock, so check before you sell) and the account size to buy the stock. If not, then turn it into a spread and close it out if the trade does not perform.

It's amazing how many experienced investors and fund managers do not know much about weekly options. The word is spreading. One minor irritating issue is many retail brokerage houses do not offer Weeklys on their platforms. E-Trade and Charles Schwab do not as of this time. Schwab is scheduled for January 2011 and E-Trade has no date. Besides the sophisticated direct access platforms, there is Think or Swim (TOS). TD Ameritrade bought TOS and clients get the platform.

As a non-client, you can still download and use the platform in play mode to paper trade and get some experience. Their support is quite good too. There is a lot to know about the various covered call writing strategies for up, down or sideways markets. The more you learn, the more you earn.

Covered Call Writing Update: Weekly Options Make Every Friday Payday!

WEEKLY

Covered Calls With Weekly Options

In the summer of 2010 the Chicago Board Options Exchange (CBOE) added weekly options to their list of available products. These work just like their big brothers, the monthlies, except that the weeklies only exist for about 9 days (from Thursday thru the following Friday). Since the time decay in an option is quickest as it nears expiration, the new weeklies make an excellent choice for covered call writers.

weekly pill box

Covered call writers have always enjoyed time decay. They sell a wasting asset and like watching it waste away. The rate of time decay increases as an option's expiration date nears, so covered call sellers typically capture a large percent of the premium in the final week or two of the option's life.

WEEKLY

CBOE knows this and they have provided new products for sellers to take advantage of this time decay.

Let's take a couple of real world examples from today and see what's possible.

It is Friday, July 30, 2010, and the market is about an hour from closing. We are interested in options that expire in 8 days, next Friday, August 6, 2010.

Here are two examples:

(1) Buy AAPL at 258.10 and sell a 250 strike call option with August 6 expiration for 9.35.
Your net debit (break even point) is = 248.75 (258.10 - 9.35)
Your profit if called away = 1.25/share (strike minus net debit, 250 - 248.75)
Your return if called = 0.5% in 8 days, or 23% annualized
(if not called, you own AAPL at a cost of 248.75)

or, if you like ETFs:

(2) Buy IWM at 65.20, sell a 63 strike Aug 6 call for 2.60.
Your net debit = 62.60
Your profit if called = 0.40
Your return if called = 0.64% in 8 days, 29% annualized

Now, an annualized rate of return of 23% or 29% may not get you excited. But for in-the-money CC writers who appreciate downside protection, this is pretty good. Yes, you can get a higher annualized rate of return with at-the-money options but you are also taking on more risk. For my money, 2%/month or better with some downside protection is good enough.

Covered Calls With Weekly Options

WEEKLY