Bigger Gains, Less Time. Tap Into the Potential of Weekly Options

Traders spoke, and the exchanges listened. And, if the growing popularity of the new weekly-expiration options is any indication, these shorter-term puts and calls will soon join their monthly-expiration counterparts as mainstream trading instruments. Just as the name implies, the newest innovation in option trading are derivatives that are issued on Thursdays, and then expire the following Friday, six trading days later. But why bother with short-duration instruments when the traditional monthly expiries have been working fine for all these years? There are actually quite a few advantages these instruments boast that simply can’t be said for the alternatives. Consider this:

• Weekly options inherently offer a greater “delta”: That just means each of them are more responsive to changes in the underlying security’s price during their lifespan than monthly options are.

• Weekly options don’t suffer from a high “theta”. In other words, time decay isn’t a major impediment for weekly options. Since they are so short in duration, there’s no excess time value (or premium) baked into the price. As a result, weekly options tend to cost less.

• Get your short-term charts and ebb/flow predictions ready: One of the primary reasons equity and index options exist in their traditional timeframes – with a lifespan of months if not more than a year – is to offer an active investor a way to leverage his or her capital, while allowing that same trader to ride out rough patches on the way to the end-goal. Weekly options, on the other hand, are a short-term chartists dream. The key question is, where will this stock/index be in a week (or less)?

• Use the market tide to your advantage: In the same vein is “think short-term”, traders should tap the market’s near-term tidal forces, since 3 out of 4 stocks tend to move in tandem with the market’s strong moves. Yes, given enough time, the best individual stock trends can defy the market’s ebb and flow. The whole point here is speed though, which means calling the market right at any given time is half the battle (whether you’re trading stock or index options).

• Keep the original intent in mind. It’s contrary to most everything we’ve been taught as investors, but the whole point of weekly options is to reap the benefit from a short-term move; get in and out accordingly. Some traders are using them to profit from news announcements (like earnings). Others are just using them to hedge a position through a certain timeframe. Don’t be afraid to cut loose once your reasonable objective has been met.

The proliferation of weekly option trading is sure to be a beneficial one for traders. Like any other trading arena though, it?s the mastery of the nuances more than the mechanics that will be the key to your success.

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