In Options contract confers the right but not the obligation to buy (call option). or sell (put option) a specified underlying instrument or asset at a specified price – the Strike or Exercise price. until or at specified future date – the expiry date. The price is called Premium and is paid by buyer of the option to the seller or writer of the option.
An option provides the holder with the right to buy or sell. A specified quantity of an underlying asset at a fixed price. (called a strike price or an exercise price) at or before the expiration date of the option. Since it is a right and not an obligation. The holder can choose not to exercise the right and allow the option to expire.
There are two types of options – call options (right to buy) and put options (right to sell).
There are several important implications of Weekly shorter expiration date. Due to the relatively short time until expiration. Weekly generally sell at a lower premium to otherwise equivalent options with longer expiration. The reason should be intuitive. Because there isn’t as much time value buyers would not pay as much for the option. because they would not have as much time for it to be in the money.
Contrast this pricing aspect of Weekly with that of LEAPS. which usually sell at a higher price than traditional options because of the greater time value. Allowing for a greater possibility the option could finish in the money.
Perhaps the most important aspect of Weekly is their potential to help traders employ short-term strategies. Including targeting volatility associated with an earnings announcement, economic report. or other key event that might occur on a specified date in the short term. Instead of purchasing a regular options contract that might last several months. You can target a specific date and time period using Weekly.
3 Reasons to Trade Weekly Options
- Maximize leverage on short-term directional moves. Buying calls and puts to speculate on a very short-term directional move with weeklies affords the option holder increased leverage , as well as decreased exposure to time decay . relative to longer-term options.
- Affordably hedge event-related risk. Weekly options can be used to implement a ” protective put ” strategy on stocks and ETFs. Which helps you limit losses on your shares when there’s concern about downside risk stemming from a specific. known event on the calendar (such as a quarterly earnings report). without shelling out the higher time value for a longer-term put option.
- Implement premium-selling strategies over shorter time frames. Selling weekly puts and calls over a time frame of days allows traders to capitalize on expected levels of technical or options-related support and resistance. or to profit from over-inflated implied volatility — while giving the underlying stock less time to move against you.
7 Benefits of Weekly Options
- Earn Faster -Every week is a new trade. You have more opportunities to perfect your trading skills in a given time period.
- Over Come Losses Faster- If you trade monthly options, you have 12 trades per year. With weekly options, you can have 52 trades per year. This gives you more time to average out your trades and hopefully have a smoother equity curve.
- Higher Annual Returns- Because you have over four times the number of trades in a year, if you can average even 1/3rd of your monthly yield per week. you should be able to have a higher annual return.
- High Theta (this is a benefit for non-directional traders)- You can get in and out much faster. Some trader are in the market one or two days per week due to the high theta.
- High Gamma (this is a benefit for directional traders)- This is a benefit to directional traders. Weekly options should be very attractive to gamma scalpers.
- Less Market Exposure- If you are in and out of your trade in a few days per week. then there are several days per week you are out of the market (flat). This reduction to market moving events is great.
- New Hedging Opportunities For Longer Term Positions- If you have a short term directional opinion. you can use weekly options in combination with monthly options or your underlying positions to protect yourself. A good example is yesterday’s FOMC announcement. You could have used the weekly options to hedge off risk until after the announcement was over and it was clear which way the market was reacting to the news.
A note of caution
The characteristics of Weekly can also present some unique risks, however.
For instance, assume you enter into a position using traditional options that does not go as you expect. If you have enough time until expiration. it may be possible to repair the position or “leg out” in order to hedge your risk exposure. Because of the short window associated with Weekly. it may not be possible to manage your risk effectively in this fashion. Also, you may want to practice-trade Weekly first to get a sense of how the implied volatility. Greeks, and other factors may differ from traditional options.
These risks are in addition to those inherent in all options. Before trading any type of options contract. You should fully understand how they work and what the risks are. If you do trade options. Weekly may help you find a better contract for your strategy.