The Lure of Weeklies (1 strategy and 4 tips)

What’s the fascination of Weeklies? Why is this the hottest thing in the options market? Buyers of weeklies use it as a hedge against their portfolios or individual strategies. They also like the fact that they can hit a home run if the price moves quickly in their favor. Sellers of options like the fast time decay and great yields you can get in 2-5 days. Let’s face the facts, trading weeklies is an adrenaline rush. If you trade 30 day trades and now you can get potentially similar yields in 3-4 days, that’s a huge temptation. The reality is that weeklies have existed for almost 30 years, the name was expiration week! Sure, expiration week only came once a month, but it was there for the taking. Bottom line, life as well as options comes with pluses and minuses that accompany every decision we make. In weeklies, you have pluses of quick potential yields, fast time decay for sellers, quick potential home runs for option buyers. Minuses are price moves can smoke premium sellers ( strategies with positive time decay), and non-moving vehicles could wreak havoc on buyers. The risks and rewards are high!

 Strategy #1 Iron Butterfly (For Premium Sellers, strategies with positive time decay) 

This involves selling a straddle at-the money and buying the strangle ( wings) for protection. An example in a $50 stock would be to sell 1 Aug 50 call and 1 Aug 50 put and buy 1 Aug 55 call and 1 Aug 45 put . This strategy will usually give you a great risk reward in that you will bring in a credit greater than your risk. A good risk/ reward is essential with weeklies. Many times you can make good profit in 2-3 days and get out because time decay is so great. If the market or your stock is more volatile, you can buy an extra call or put for insurance at the beginning of the trade , or as an adjustment.

 

4 Tips

1. Use a small percentage of your capital for weeklies. If I’m doing $10,000 in Calendars, I may trade 10% ($1,000) of the calendars using weeklies. It adds a little Louisiana hot sauce, but not too much! 

2. When doing credit spreads, stay away from adjustments and just get out! Unless your’re pretty experienced and nimble, adjustments can turn into a nightmare. When price movement goes against you with weeklies, it’s like a locomotive coming straight on.

3. Also with credit spreads, keep your maximum loss on your trades at or under your normal winning months and you might actually have a credit spread business one day!

4. Stick with similar vehicles each month for familiarity.

Have a great summer and keep working on the craft!  

Dan Sheridan 

dan@sheridanmentoring.com