Weekly Options – How and When To Use or Avoid

Recently, the use of Weekly Options has generated more SaferTrader.com “how and when to use” questions, emails and members-only Forum commentary than most other subjects.

In this “white paper,” we’ll look more closely at the opportunities and pitfalls associated with this intriguing investment instrument.

The Appendix at the end of this article provides a list of all currently available weekly option instruments.

A Peek Ahead: There are some excellent conservative-investor uses for weekly options, but while they offer great benefits for some types of investments, they should be avoided for others. We’ll review the how, when, and why they may fit your objectives.

Quick Review of Mechanics

    1. Weekly options began in 2005, utilizing the S&P 500 as the underlying. It wasn’t until 2010 that weekly options on individual stocks were made available at various exchanges.

    2. Weekly options are now available on many indexes, ETF’s, and individual stocks. The list is growing. The list of “availables” as of early 2012 appears in the Appendix of this “white paper” article.

    3. Weekly options begin trading on Thursdays, and expire the Friday a week later (an 8-day life span). But they are not offered for the final week of trading of regular monthly options since the values of the weekly and monthly options would be identical during the final week before expiry.

    4. Both American-style and European-style options are available. American style can be exercised at any time; European-style only on expiration day. As with regular monthly options, weekly options can be bought or sold at any time prior to expiration.

    5. The liquidity of weekly options is a significant issue. Typically weekly option volume is about 10% of the total option volume of the underlying. The significance lies in the fact that lower trading volume equates to wider bid-ask spreads and therefore more slippage when entering or exiting a trade.

Time is of the Essence

Not surprisingly, “time” is the key to when weekly options confer benefits vs. when the weeklies should be avoided.

    1. Weekly options operate in the environment where the time decay curve is at its steepest, i.e. the time decay an option undergoes is not uniform. Value erodes most rapidly as we near expiration.

    2. The fact that time value is disappearing rapidly as an option approaches expiration is beneficial if we are buying out-of-the-money weekly options because the premium we would need to pay for extrinsic (time) value is already in sharp decline.

    3. Conversely, sellers of options (income seekers like “The Monthly Income Machine” folks) may not be offered a worthwhile premium on weekly options unless they accept closer to the market strike prices. That problem is compounded by the fact that the markets, on balance, are making increasingly large daily movement.

    In 2011, the S$P 500 underwent greater than 2% daily swings in value on fully 15% of trading days… compared to less than 9% of the days the prior year.

Advantages of Weekly Options Determine When They Are Best Used

In general, statistics for options buyers are pretty grim. Most out-of-the money (OTM) options expire worthless, resulting in most outright buyers of OTM options losing money over the long run … whether they be monthly or weekly options.

However, there are specific situations when outright purchase may be a viable approach:

    1. Cheap Insurance in connection with an “event.” Earnings reports and other “known” events can produce very large price swings when they occur. Because time decay continually erodes the value of options, you can hedge a stock (or an option position of any kind) at low premium cost for a short time with a weekly option.

    You would buy the weekly calls or puts – in the opposite direction of your position being protected – for the week that overlaps the expected announcement or event date.

    2. Speculative Outright Position. If what is sought is a speculative gamble on the outcome of an event, i.e. a “directional” trade, the weekly option that overlaps the event will offer a lower premium cost than a monthly or quarterly option purchased earlier. Again, this is due to the fact that you need to pay for much less time.

    3. Reverse Iron Condor. Basically, this approach involves two spreads like an income-oriented Iron Condor, but the spreads are “debit” spreads because your near strike price for each spread is “long” and the more distant leg is the short. Your account is debited the net difference on each Reverse Iron Condor spread, rather than being credited as with a regular Iron Condor.

    Using weekly options for Reverse Iron Condors makes sense because, once again, the premium is significantly smaller since there is less time to expiration. Since this is a debit spread, you want to pay as little premium as possible.

Disadvantages of Weekly Options Determine When They Are Best Avoided

The disadvantageous factors associated with weekly options are essentially corollaries of their advantages.

    1. Weekly Options Not Advantageous for Credit Spreads.

    The underlying rationale for credit spread strategies like “The Monthly Income Machine” is to provide the conservative income-oriented investor with a vehicle that can produce substantial reward with substantially less risk than other approaches.

    It is based on receiving profit (premium), garnered from option buying speculators, by selling them the time they need for their options speculations.

    Bottom line, credit spread investors want to collect that premium built into the out-of-the-money options price that is based on “time remaining to expiration.” On appropriate underlying stocks, ETF’s, and indices, that premium can be substantial even at strike prices quite distant from the current market.

    It follows, then, that weekly options offer a lot less premium value for the option seller to gain than he could earn by earlier selling of monthly ones because there is so little of the time built into the weekly option’s life.

    Typically, the only way to collect a really attractive premium selling a weekly option is to use strike prices that may be dangerously close to the current market.

    2. Other Potential Disadvantages to Weekly Options.

      a) The Fun Factor.
      While the “action” provided by weekly expirations allowing for more trades throughout the month may be a dubious benefit for the thrill-seeker, it can represent a potentially dangerous temptation for conservative investors to over trade their accounts.

      b) Commission Costs. Obviously, brokerage firm adoration of weekly option traders is surpassed only by their love for day traders. While commission costs nowadays are quite reasonable at option-friendly brokerages, making 3-4 times as many trades/month makes even a small account very profitable for the brokerage house… but not necessarily for the trader.

      c) Wider bid-ask spreads. As noted earlier, weekly option volume and open interest are considerably less than for monthly options. Consequently, you are likely to be dealing with considerably more price slippage when entering or closing out a trade because less active options involve wider bid-ask quotes.

      d) Theta Risk. Theta, you will recall, is the “Greek” indicator that measures the rate of option value decay as time passes. The rate of time decay premium value erosion accelerates explosively as options nears expiration… and with weekly options, that increasing loss of value is already underway when the position is established, and keeps accelerating every hour from that point. This is clearly a detriment to the option seller.


    Weekly options are best employed when we particularly want to be in the game during an upcoming known event and want to speculate on the outcome.

    The advantage of using weekly rather than monthly options when buying puts or calls for this purpose is that there will be less premium cost than monthlies bought earlier; as we’ve discussed, option premiums are very dependent on the amount of time remaining before option expiration and the option buyers can pay less premium because there is less time left until expiration.

    From the standpoint of collecting premium, as with credit spreads, the reverse is the case. The monthly options will offer the option net seller more premium than the weeklies – at the same price of the underlying stock, index, or ETF simply because the additional time to expiry confers additional premium value.


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    Note: We can – and do – guarantee your satisfaction with “The Monthly Income Machine” detailed how-to blueprint for conservative income investors. No one, however, can guarantee market profits. For a full description of the risks associated with such investments, see Disclaimers.





    (last updated January 4, 2012)
    Indices and EFTs

    OEX S&P 100 Index (American style) Index, pm-settled, cash
    XEO S&P 100 Index (European style) Index, pm-settled, cash
    SPX* S&P 500 Index Index, pm-settled, cash
    DJX Dow Jones Industrial Average Index, am-settled, cash
    NDX Nasdaq-100 Index Index, am-settled, cash
    RUT Russell 2000 Index Index, am-settled, cash
    AGQ Pro Shares Ultra Silver ETF
    EEM iShares MSCI Emerging Markets Index ETF
    EFA iShares MSCI EAFE Index Fund ETF
    EWZ iShares Brazil Index ETF ETF
    FAS Direxionshares Daily Financial Bull 3X Shares ETF
    FAZ Direxionshares Daily Financial Bear 3X Shares ETF
    FXE Currency Shares Euro Trust ETF
    FXI Ishares FTSE/Xinhua China Index Fund ETF
    GLD SPDR Gold Trust ETF
    GDX Market Vectors Gold Miner ETF
    IWM iShares Russell 2000 Index Fund ETF
    QQQ Power Shares QQQ Trust ETF
    SDS Proshares Ultra Short S&P 500 ETF
    SPY S&P 500 Depository Receipts ETF
    SLV iShares Silver Trust ETF
    SSO Pro Shares Trust Ultra S&P 500 ETF
    TBT Proshares Ultrashort Barclays 20+ Yr. Treasury ETF
    TLT iShares Trust Barclays 20+ Yr. Treasury Bond Fd. ETF
    TZA Direxion Daily Small Cap Bear 3X Shares ETF
    USO United States Oil Fund ETF
    UNG United States Natural Gas Fund ETF
    VXX iPath S&P 500 VIX Short-Term FT ETF
    XLE Energy Sector SPDR ETF
    XLF Financial Select Sector SPDR ETF


    AA Alcoa Incorporated Equity
    AAPL Apple Corporation Equity
    ABX Barrick Gold Corp. Equity
    AIG American International Group Equity
    AMZN Amazon.com Inc Equity
    ANF Abecrombie and Fitch Company Equity
    APA Apache Corporation Equity
    AXP American Express Company Equity
    BA Boeing Company Equity
    BAC Bank of America Corp Equity
    BBBY Bed Bath & Beyond Inc. Equity
    BIDU Baidu Inc. Equity
    BP British Petroleum Equity
    C Citigroup Equity
    CAT Caterpillar Inc. Equity
    CF CF Industries Holdings Equity
    CLF Cliffs Natural Resources Equity
    COP ConocoPhillips Equity
    CSCO Cisco SystemsInc. Equity
    CREE Cree Inc. Equity
    CRM Salesforce.com Inc. Equity
    CVX Chevron Corp Equity
    DE Deere and Company Equity
    F Ford Motor Company Equity
    FCX Freeport McMoran Copper CL B Equity
    FFIV F5 Networks, Inc. Equity
    FSLR First Solar Inc. Equity
    GE General Electric Company Equity
    GM General Motors Company Equity
    GMCR Green Mountain Coffee Roasters Inc. Equity
    GOOG Google Inc Equity
    GRPN Groupon Inc. Equity
    GS Goldman Sachs Group, Inc. Equity
    HAL Halliburton Company Equity
    HD Home Depot Inc. Equity
    HPQ Hewlett-Packard Company Equity
    IBM International Business Machines Equity
    IDCC InterDigital Inc. Equity
    INTC Intel Corporation Equity
    JNJ Johnson and Johnson Equity
    JOY Joy Global Inc. Equity
    JPM J. P. Morgan Chase & Company Equity
    KO Coca Cola Equity
    LNKD LinkedIn Corporation Equity
    LRCX Lam Research Corporation Equity
    LULU Lululemon Athletica Inc. Equity
    LVS Las Vegas Sands Corp. Equity
    MA MasterCard Inc. Equity
    MCD McDonalds Corp. Equity
    MCP Molycorp, Inc. Equity
    MGM MGM Resorts International Equity
    MMM 3M Company Equity
    MOS Mosaic Company Equity
    MRVL Marvel Technology Equity
    MSFT Microsoft Corporation Equity
    MU Micron Technology Inc. Equity
    NEM Newmont Mining Corporation Equity
    NFLX NetFlix Inc. Equity
    NKE Nike Inc. Equity
    NVDA Nvidia Corp. Equity
    NVLS Novellus Systems Inc. Equity
    ORCL Oracle Corporation Equity
    OXY Occidental Petroleum Corp. Equity
    PCLN Priceline.com Inc. (new) Equity
    PCX Patriot Coal Corp. Equity
    PFE Pfizer Inc. Equity
    SINA Sina Corporation Equity
    POT Potash Corp Saskatchewan Equity
    QCOM Qualcomm Inc. Equity
    RIMM Research in Motion Limited Equity
    RMBS Rambus Inc. Equity
    S Sprint Nextel Corp. Equity
    SLB Schlumberger Ltd. Equity
    SLW Silver Wheaton Corp. Equity
    SNDK SanDisk Corp. Equity
    SU Suncor Energy Inc. Equity
    UTX United Technologies Corp. Equity
    V Visa, Inc. Equity
    WFC Wells Fargo & Co. Equity
    WLT Walter Energy Equity
    WMB Williams Companies Equity
    WMT Walmart Equity
    WYNN Wynn Resorts Ltd. Equity
    X United States Steel Corp. Equity
    XOM Exxon Mobil Corp Equity
    YHOO Yahoo Inc Equity
    YOKU Youku.com Inc. Equity

    * S&P 500 Index (“SPX”) Weekly options trade on CBOE with PM settlement and are listed under the root ticker symbol “SPXW” and are commonly included in SPX (traditional) options chains which are AM settled. Separately, the C2 Options Exchange lists S&P 500 Index options with PM settlement, under the ticker symbol SPXPM, that expire on the same Friday of the month as traditional SPX options that trade on CBOE.


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3 Responses to “Weekly Options – How and When To Use or Avoid”

  1. I am in agreement with Ken here. Writing weekly credit spreads works for a while and those recurring premiums are exciting. That is until a bad event hits and it absolutely will sooner or later. The market gaps way down on the open and since you are within 3% of the market, your spread hits the max loss. It that’s a 20 point spread and you collected $0.20 you’ll lose $19.80 per share. For me it turned a sizable account into a small one very quickly.

  2. Weekly options aren’t really “weeklies” anymore. They trade much longer than 8 days. I recently entered a “weekly option” that had 25 days to expiration.

  3. I have been writing weekly credit spreads, put and call, for the last 6 weeks. The first week I lost money on Amazon even though it ended OTM. The next five weeks since I have averaged a profit of 6% per week using mainly RUT, SPX and GS. I use OptionsExpress Idea Hub for Premium Harvesting and write spread whose chart shows at least a 90% chance the Optios will expire worthless. They all have so far.

    Please let me know what you think of this strategy.

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