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What do you think of trading weekly stock options?

There is nothing wrong with weeklys. Of course, it all depends how you trade them. Before, when weeklys were new, there was a problem with liquidity. Not anymore. Then, if you trade weeklys as monthlys, meaning you pick a weekly option but still with 30 or more days to expiration. For example, you pick BA February 28, 2020 280 put option, which is still a weekly options but with 37 days to expiration then there is nothing wrong doing it. You will just have more options to pick strikes and expiration dates than just monthlys.

If you, however, want to trade them a truly weeklys meaning you want to pick them to have 7 days to expiration then there is also nothing wrong with it but be prepared for potential limitations (I wouldn’t call it risks because I deem options less risky than stocks) such as short term to expiration will limit your ability to adjust the position should it go against you, you would have to be too close to the market to collect a decent premium so you run a risk of ending in the money – which is OK when trading equities rather than SPX, for example, and there may be a limit that if you want to roll from one weekly to another, or to monthly or quarterly option, the strikes you want to roll in may not exist and you would have to roll to different strikes which may change the entire trade characteristic and risk profile (for example adding more risk to the trade). Other than that, there is no problem at all.

My view on options, mainly my claim that options are less risky than stocks, sparked controversy among less informed:

This guy “deems options less risky than stocks”.

I would advise you against taking him seriously. ~ Jacob Nikolau

If you think that I am wrong, as the guy suggested, then review the following situation:

A trader A buys 100 shares of a stock at $30 a share.

A trader B sells a cash covered put with 26 strike price.

The stock ends at $20 a share at expiration.

Trader A sees $1,000 loss.

Trader B sees $600 loss.

Who holds a riskier asset?

Trader A holds 100 shares of a stock ABC at $30 a share and does nothing.

Trader B holds 100 shares of a stock ABC at $30 a share and sells 20 strike call options (ITM option) and receives 12.55 premium.

The stock drops to 22 a share. Who is better off? Trader A or trader B?

Where is the risk? On the stocks or the options?

4 responses to “What do you think of trading weekly stock options?”

  1. Amber Tree says:

    Thanks for pointing me to the weekly options. I am limiting myself to the monthlies, mainly because of liquidity (volume and spread). It is worth to look in all cases what weeklies can do for me to be closer to a number of days that I prefer.

    • Martin says:

      The monthlies are still good choice as far as the liquidity and volume but today, most good quality stocks have weekly\’s with good volume and liquidity too. I still trade them with 20 – 45 DTE but use weekly\’s if 45 DTE (for example) falls on a weekly option expiration.

  2. Independus says:

    “A trader A buys 100 shares of a stock at $30 a share.

    A trader B sells a cash covered put with 26 strike price.

    The stock ends at $20 a share at expiration.

    Trader A sees $1,000 loss.

    Trader B sees $600 loss.

    Who holds a riskier asset?”

    Well, trader A has a maximum risk of 3,000$ and wants compensation for this risk. This compensation is in the form of (unlimited) upside potential. Trader A doesn’t know whether the stock goes up from 30$ or down, but given the probability that it may go up he makes the decision to assume the risk of potentially losing 3,000$. If trader A knew the stock would only go down, obviously he wouldnt buy the stock nor sell a naked put.

    Lets attach some probabilities here and lets assume premium to sell put totals 100$:

    40% stock goes to 40

    60% stock goes to 20

    Trader A’s expected p&l: 40% x 1000 + 60% x -1000 =-200$

    Trader B’s expected p&l: 40%x premium + 60% x (-600 + premium)=-260$

    So on a risk-asjusted basis, trader A would be better off. Of course it all depends on what probabilities you use and what the size of the premium is. The point is however that the narrative you provide in your example is too simplistic and rather deceiving. You don’t paint the full picture

    • Martin says:

      Mathematically, you can prove any narrative you want, but the simplistic approach is usually the best and simple. No matter what other variables you throw into an equation, the basics are still same and simple, If we simplify it and say you buy 100 shares at $30 a share or sell a put with 30 strike your cost basis is either $30 a share or $30 minus premium a share (let\’s say 0.30, so his cost basis is 29.70 in lieu of 30 a share, given everything else is same) no matter what other variables you use after the fact that the both traders enter a position. And no trader knows what will happen. So I am comparing two type of traders – a long term investor who buys directly and one who buys selling options.

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