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How to Trade Weekly Options for Income: A Complete Guide

How to Trade Weekly Options for Income: A Complete Guide
Lee FitzSimmons Mar 14, 2020
Want to Earn Some Extra Money?

If you’d like to create a revenue stream that’ll give you more financial independence, then you’ll probably be interested in learning various strategies about how to trade weekly options for income.

Weekly options are short-term options that usually have the exact same specifications as standard options contracts listed for that particular asset.

These kinds of options are now very popular with a wide array of investors and financial experts.

Because of this popularity, the Chicago Board of Options Exchange (CBOE) has increased the number of weekly options (also referred to as “weeklies”) in the marketplace.

Now it is possible to have up to six weeks worth of weekly options available at any time.

Also, the number of underlying securities that offer weekly options has grown from just a handful to over 350.

Two Different Types of Options

First of all, if you don’t know anything about options, then here a few terms that you’ll need to be familiar with.

Call Options

These options are financial contracts that’ll give you the ability to buy an asset at a specific price within a defined period of time.

You make a profit when the price of the underlying asset increases.

For example, let’s say you buy call options that let you buy a stock for $10.

Now let’s say that this stock’s price rises to $20 before the options run out of time.

You can now buy the stock for $10 a share and then sell it for $20 per share.

You’ll make $10 dollars for every share you trade.

Put Options

These options are financial contracts that’ll give you the ability to sell an asset at a specific price within a defined period of time.

You make a profit when the price of the underlying asset decreases.

Suppose you buy put options that let you sell a stock for $20.

Now let’s say that this stock’s price drops to $10 before your options expire.

You can now buy the stock for $10 a share and sell it at $20 per share.

Thus, you earn a profit of $10 for every share you trade.


Now before we go any further, you’ll also need to be familiar with Greeks.

These are words that are used to describe the variable aspects of both monthly and weekly options.

Here are the five terms that you’ll need to know:

  • Delta – The ratio that compares movements in the price of an underlying asset to the change in the price of its derivative
  • Gamma – The rate of change in an option’s delta for each one point move in the price of its underlying asset
  • Rho – The rate at which a derivative’s price changes relative to a movement in the risk-free rate of interest
  • Theta – The rate of decline in an option’s price due to the passing of time–also referred to as time decay
  • Vega – A measurement of volatility

Exploiting the Advantages of Time Decay

The last days of the life of an option offer the quickest time decay (Theta).

Because of this, weekly options are popular with financial managers who like to collect option premiums.

This means that they can sell an option with up to eight days of time before expiration.

After they sell these options, all they have to do is wait for them to expire.

This process can be repeated as many as 52 times every year.

Because of the ease and practicality of these types of trades, many individuals use this strategy.

So let’s now take a look at some important strategies, so you can learn how to trade weekly options for income.

1. Avoid Sluggish Stocks

Weekly options are short-term financial instruments.

Available options range only five to six weeks into the future.

Therefore, slow moving stocks usually don’t have enough time to make a move in your direction.

Because of this, our first piece of advice is to carefully examine and possibly purchase weekly puts and calls on stocks that have a history of price swings.

By focusing on short-term volatility, you can often reap excellent rewards if you select the correct trades.

However, weekly options aren’t a good way to initiate a bullish play on a blue chip that doesn’t have momentum.

This is because they don’t have adequate time value to allow for long-term investment strategies.

Instead, weeklies are a good way to play a stock that you think will have a fast move either up or down.

One exception to this would be a special situation where a slow mover has a reason to jump, and you believe that the market has ignored this potential volatility.

These special situations would include events like an industry conference where a company is scheduled to make an announcement.

However, weekly options aren’t exclusively for buyers.

This is because stocks that are range-bound will often make great opportunies for those looking to write options that will expire without too much difficulty, so the premium can be collected.

That’s why it pays to keep an open mind.

2. Identifying Catalysts

The next item in our guide about how to trade weekly options for income involves the ability to identify catalysts.

There are several different types of indicators that may help signal a large impending move with a particular stock.

For instance, upcoming events (like a product launch or a quarterly earnings report) have been known to trigger massive price moves in equities.

You should also keep an eye out for historically volatile stocks that have just recently had a period of consolidation because this might indicate that another large move is due sometime in the future.

In addition, whenever your Bollinger Bands are pinched together tightly, you should take notice because this is a technical indicator that may offer valuable clues about these types of events.

You should also be on the lookout for a healthy supply of short interest.

This is because short squeeze rallies often result in major upside moves in a very quick period of time.

3. Look For Narrow Bid/Ask Spreads

When it comes to learning about how to trade weekly options for income, this is a rule that you must absolutely be aware of.

You see, when a stock’s option creates a heavy amount of volume every day, the bid-ask spreads tend to be more narrow.

In other words, there’s not that big a difference between the lowest price someone is willing to pay for a  security and the highest price that it’s selling for.

So let’s now take a look at two primary benefits to trading liquid options with narrow bid-ask spreads.

Get In and Out of Trades Easily

The first benefit is that you can ensure that you’ll be able to get in and out of the position without too much difficulty.

This is because there’s a healthy demand for these contracts.

Reduce the Effects of Slippage

The second benefit is that you effectively reduce the negative effects of slippage, which refers to the fact that some traders buy at the ask price and sell at a lower bid price.

Therefore, the smaller the difference between the bid and ask prices at the beginning of a trade, the less worries you will have about any sort of slippage impacting your potential profits.

You should be careful, however, because sometimes when a stock has a narrow bid-ask on its standard options, the weekly options might have a larger spread.

So whenever you are dealing with a trade that has a wide bid-ask spread, it is probably best that you place only limit orders whenever you enter this trade.

These limit orders should be placed somewhere between the bid and ask prices.

By doing this, you can dramatically improve your odds of getting the price you want.

Now if you are trying to get out of the position on an option that is in the money with a wide bid/ask spread, you need to try and get the intrinsic value for your option because sometimes the bid price may actually be lower than its intrinsic value.

4. Take Advantage of Hedging Opportunities

Weekly options will often carry a lower amount of time value than their monthly counterparts.

Because of this, they offer an affordable way to hedge your positions against any sort of event-related risk by using the protective put strategy.

So if you were holding shares of a stock that’s due to report quarterly earnings in the next few weeks, buying the appropriate weekly put option might be cheaper than purchasing the extra weeks of time value (or Theta) that is already included in the price of a monthly put.

In addition, surprise events can push any kind of implied volatility higher.

So it usually makes a lot of sense to compare the levels of volatility (Vega) before you commit to any sort of option buying strategy.

With everything else being equal, a shorter-term option will usually be much cheaper than any of the longer-term choices that you might have available.

Buying put options is a good way to hedge your bets, which means you’re hoping that the contracts will expire worthless, but if there is a sudden emergency and the price of your asset drops, then you have protection.

That’s why it makes a lot of sense to try and minimize the amount of capital spent when utilizing this strategy.

5. Convexity

Our next piece of advice in our guide about how to trade weekly options for income deals with the issue of convexity.

This is because whenever a stock drops a single point, call options with an initial Delta of 50% loses one half of a point.

However, your call option will now have a lower delta.

This means that the next drop in the stock’s price won’t result with as large a loss in the option’s Delta.

This sort of positive curve will reduce an option holder’s risk for every successive decline in the underlying shares.

Otherwise, a stockholder would continue to lose the same amount for each successive drop in the stock’s price.

In addition, convexity works in the same way as the stock moves to a higher price point.

Therefore, a call options Delta will increase on each rise in the share’s price.

This sort of action means that the call holder in will enjoy much larger gains as a trend establishes higher price points.

Because weekly options have little time value, they’re a great vehicle for taking advantage of convexity.

So if the stock’s price changes in your direction in the time right frame, you’ll stand to benefit greatly.

You’ll also minimize your risk because of the potential loss that occurs due to the inevitable impact of time decay.

6. Offsetting Positions

These types of plays can be made at various times during the month between weeklies and monthlies.

Sometimes the expiration of the monthly counterpart is identical to the expiration of the weekly option.

When this happens, there might be a difference in price that can be captured between the two of them.

7. Rolling positions

Another trading strategy that you might want to try out involves you taking a position with a monthly contract while taking rolling positions in the weekly contract in the opposite direction.

Basically, you’re trying to establish a consistent hedge against any short-term market volatility.

However, you need to make sure to include the higher commission costs in your calculations.

8. Income Supplementation From an Underlying Position

This strategy involves using weekly options in order to supplement income from an underlying position.

Many people call this type of approach a call writing strategy.

This is because the investor that owns the underlying instrument writes calls on this position and collects the premium.

So if the underlying instrument remains static or takes a fall, you’ll make a profit.

You should also be aware that if the underlying instrument rises, you may miss out on some of the profit.

However, you still have downside protection that you can use to justify this sort of risk.

Other Types of Weekly Options

Because this is a complete guide about how to trade options for income, let’s take a look at some other types of weekly options that are available.

Weekly Options on Futures

Weekly options on futures allow you to make more precise trading maneuvers as well as manage risk more effectively whenever you’re trading futures contracts.

Generally speaking, many traders will turn to the precision of weekly expiring options in order to enhance existing positions.

This precision to cap trading opportunities can often be connected to some type of market moving event.

These events would include things like Sunday elections and Wednesday FOMC meetings.

Major Benefits and Applications

With these financial instruments you have an increased amount of liquidity.

They’ll also allow you to participate in event-driven trading during the week.

In addition, you can also trade Gamma and capture arbitrage opportunities if you desire to do so.

They also allow you to strengthen your existing positions in order to better accommodate short-term fluctuations in the market.

In addition, you’ll not pay as much for premiums because of the lower amount of time that is covered.

Weekly FX Options on Futures

Weekly FX options on futures give you short-term expiration dates that let you have more efficient risk management when trading in the FX markets.

By using these kinds of options, you’ll have more precise risk management.

FX options expire on Wednesday.

The addition of these types of options gives you the opportunity to really fine-tune your complex trading strategies.

This is especially true when it is done advance of with midweek market moving reports and/or events.

They have the same specifications of the existing options that expire on Friday.

Primary Benefits

These options are available on EUR/USD, JPY/USD, GBP/USD, AUD/USD and CAD/USD.

You also have the option of two different formats, which are premium quoted formats or volatility quoted formats.

Weekly Options on U.S. Treasury Futures

Weekly U.S. Treasury options give you additional flexibility to manage your positions when you are trading U.S. Treasury futures.

Wednesday Weeklies

These options will let you refine your trading strategies to a much greater degree.

One of the main reasons for this is because Wednesday expirations coincide with FOMC meetings.

These options expire on Wednesdays at 3:00 p.m. Eastern Time.

Friday Weeklies

These particular options will give you an enormous amount of liquidity.

They expire every Friday except when there is already a quarterly or serial Treasury option expiration.

All of the new Friday weeklies are listed the business day following each expiration date.

Weekly Options on Agricultural Futures

Weekly agricultural options will provide you with greater flexibility, so you can customize your risk with a wider array of strategies.

New expiring options are provided every single week of the year, and they are based on front month futures contracts.

They expire on Friday as long as that day isn’t an expiration date for either serial or quarterly options.

You can especially benefit from these financial instruments if you hedge around high-impact events such as USDA reports.

In addition, you can improve your positions in order to accommodate short-term market fluctuations.

You also don’t have to pay as much in premiums because of the smaller amount of time covered.

Final Thoughts About How to Trade Weekly Options for Income

If you want to trade weekly options, then you may be able to benefit from these suggestions.

So go ahead and give some of these financial strategies a try.

If you’re really successful, then you might even be able to quit your day job and work at home.

Just remember that one of the most important elements to successful trading is doing your due diligence.

If you have anything else you’d like to add on this guide on how to trade weekly options for income, feel free to let us know in the comments below.

Lee FitzSimmons

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