Understanding Weekly Options Trading and the Useful Strategies

What Are Weekly Options?

Weekly options are a type of financial derivative contract that allows investors and traders to buy or sell an underlying asset, such as stocks, exchange-traded funds, or indices, at a predetermined price within a given week. The options usually expire on Fridays, so their lifespan will be short.

The term of use is generally prolonged for conventional options, which expire every month. On the other hand, weekly options provide a more frequent opportunity for trading and hedging strategies. In order to respond to the need for greater flexibility and speed of trading, they have been put on the market.

Weekly Options Trading’s First Appearance

The Chicago Options Exchange launched the Standard Call option in 1973, which we’re familiar with today. The option of placing a put was introduced in 1977. Both have proved very popular because trade volumes have grown tremendously over the last decades. The Chicago Board Options Exchange introduced the call option 32 years ago and started a pilot program with weekly options in 2005.

On paper, any strategy you can implement with the longer expiry dated options you can also do with weekly. The weekly is a bountiful one to premium buyers who wish to take advantage of the accelerated time decay curve during the last week of an option’s life.

The Requirements for Weekly Options Trading

Like any other kind of trading, weekly options trading requires some skills for a trader to succeed. The following will explain some of these skills and ways to acquire them effectively.

Chart Analysis Skills

As a long-term trader, you must first learn how to read stock charts and interpret them correctly. To do so, you can use either technical analysis, fundamental analysis or a combination of both. Technical analysis focuses on price chart interpretation through technical tools such as indicators or techniques such as reading the volume, using trendlines, and wave theory. Etc. While fundamental analysis deals with the economy more than the price chart. In this type of analysis, you use some factors such as News, events, The overall state of the economy, The strength of the specific industry, The financial performance of the company issuing the stock or any other element that can determine the actual worth of an asset or stock share. If you want to become a weekly options trader, you need to be able to decide on the upcoming value of the price, no matter which type of analysis you use. On the way, you will be on a “Call” if you predict that your asset’s price is undervalued and will go up within the upcoming weeks or keep a “Sell” position if you feel the asset’s price is overvalued and will decline through the following weeks. So, put some effort into learning techniques and methods and analysing market trends to determine when it is an excellent time to buy and sell. 

Risk Management

First of all, what’s the risk management in weekly options trading? That’s how to limit financial risk in your trading strategy by doing everything you can. Risk management will vary from one trader to another. You will have to consider your particular risk tolerance to effectively create a risk management plan. Aggressive traders can still afford to take risks, but the scope of such risk management will be lower than those who are cautious.

However, it is essential to learn that managing risk does come with lower profit potential. This is because many tactics you’ll be using will involve hedging your bets and exercising options early to make a profit. More aggressive traders may take on more risk but can also make a more significant profit. To start with any investment style, developing a trading strategy and complementing your risk tolerance as soon as possible is essential. Determine the amount of risk you are willing to take with your weekly trades before you place any orders. 

How to Trade Weekly Options for Weekly Income?

Weekly options trading works like standard options trading but with some key differences due to their shorter life span and more frequent expiry dates. For the week’s options trading, this is how things usually work:

1. Selecting Underlying Assets:  You will first need to find out which asset you want to trade options on. This could mean a particular stock, an exchange-traded fund, a currency pair or an index. There are no available weekly options for all assets, so it is important to verify whether an investment that interests you offers a weekly option contract.
2. Choosing Strike Prices and Expiration Dates:  You must select a strike price and expiration date for the week’s options contract as soon as you choose an underlying asset. If you purchase this option, the strike price means how much it is possible to buy or sell your underlying asset. The expiry date shall be when the option contract becomes void if not exercised. There is usually a Friday expiration on the weekly options before the market closes.
3. Select Buying or Selling Options:  You can buy or sell options contracts according to your market outlook and strategy. The options are two types: Call Options and Put Options. A call option provides the right to buy an asset at its strike price, while a put option represents the right for the holder to sell that asset at any time.

• • Buying Call/Put Options: If you expect the underlying asset’s price to rise (for call options) or fall (for put options), you can buy these options to profit from the price movement. Your risk is limited to the premium you pay for the options.
  • Selling Call/Put Options: If you have a neutral or bearish (for call options) outlook on the underlying asset, you can sell (write) a call or put options to collect the premium. However, be aware that selling options involve higher risks, as your potential losses can be substantial if the market moves against you.

4. Managing Positions: By buying back the options you sold or selling the options you bought, you can decide to close your position before the expiry date, as with any options trading. This way, you will be able to take advantage of profits or reduce potential losses. Depending on the broker’s rules and account configuration, your option can be automatically activated if it is “In-The-Money” (ITM) at expiry.
5. Risk and Reward Considerations: Understanding the risks associated with options trading and having regard to possible losses of all premiums paid for options is essential. The options could have high leverage, bringing about gains and losses. When trading weekly options, it is necessary to manage risks appropriately.
6. Market Volatility:  Due to their shorter duration, the hourly options may be more susceptible to fluctuations in market volatility. The higher volatility might lead to an increase in the price of options, while lower volatility will result in a cheaper option.

As trading options may be volatile and more unpredictable than long-term options, you need to keep an eye on them, mainly weekly options. Before starting to trade options or derivatives, it is recommended that you learn the mechanics and strategies behind these types of trading as well as seek expert advice from an investment advisor.

 

What Are the Most Successful Time-Tasted Weekly Options Trading Strategies?

The Weekly Options Trading Strategy is a technique that relies on the unique characteristics of each week’s options contracts. These strategies are in line with the Standard Monthly Plans, but they have been adapted to take advantage of a shorter period and more frequent expiry dates for weekly options. In the following, some of the most successful time-tasted weekly options strategies are explained. But keep in mind that research different strategies and decide which one is right for you.

1. Weekly Covered Call:

• • Strategy: This strategy consists of holding a position in an underlying asset, such as stocks, and simultaneously selling that particular asset’s call option.
  • Objective: In order to generate revenue from the premium received when a call option is sold, traders use this strategy. If the option is exercised, they are obliged to sell their underlying property at a strike price but still take advantage of any potential appreciation up to this point in time.
  • When to use: This strategy can be used in cases where the trader has a neutral or slightly bullish opinion of the underlying asset and would like to increase returns by paying premiums for weekly call options.

2. Weekly Cash-Secured Put:

• •  Strategy: A trader will sell put options and set aside at least a portion of its own funds to purchase an asset that will be bought if it exercises the option.
  •  Objective: The trader wants to profit from the premium he receives for his put option sale. They shall be bound by the obligation to buy an actual asset at a strike price, lowering its cost basis if they exercise their option.
  •  When used: This strategy may be applied if a trader is willing to pay for an asset at a strike price and generate income while he waits for his opportunity.

3. Weekly Long Straddle:

• •  Strategy: A long straddle consists of buying both call options and putting options on the same underlying asset with identical strike prices and expiry dates.
  • Objective: If traders expect significant price volatility but do not know what direction to go, they will use this strategy. They’re hoping to profit from huge price fluctuations in one direction or another.
  • When to use: If there is an imminent event or announcement that could have a significant impact on the market, this strategy is appropriate.

4. Weekly Long Strangle:

• •  Strategy: A long strangle involves purchasing a call and putting options on an underlying asset in parallel, as with a long straddle. The strike price of a put, however, tends to be below the call’s strike price.
  • Objective: In the event of significant price volatility, traders take advantage of this strategy when they think their movements will be influenced in one direction. The purpose is to make profits in a sharp price shift and reduce costs compared with the broad straddle.
  • When to use: This strategy should be used if there is a risk of high volatility, but the trader has a directionality of underlying asset movements.

These are only some successful strategies you can use in weekly options trading. You can find more strategies by Searching Phrases like “weekly options trading strategies pdf” on Google. Make sure to test the strategy you select on a demo account to determine whether it works for you. If you want free access to a real-time simulated options trading demo account, you can use CloseOption‘s Demo account and sign up for free by clicking Here. 

Use stop-loss orders and employ a good money management technique

 Stop-loss orders are orders a trader places to buy or sell a specific stock when it reaches a certain price. A stop-loss limits the investor’s loss on a security position. For example, if you set a stop-loss order at 20% below the price you bought the shares, your loss will be reduced to 20%. Let’s say you purchased Microsoft MSFT at $30 a share. You’ll enter a stop-loss order of $25 right after you buy the shares. If the stock trades below $25, you’ll sell your shares at a market rate.

 A stop-limit order is similar to a stop-loss order. However, as their name states, there is a limit on the price at which they will execute. A stop-limit order specifies two prices: the halt price, which will convert an order into a sell order, and the limit price. Instead of becoming a market order to sell, a sell order becomes a limit order, executed only at a limit price, or better yet, at a limit price.

 How to Determine the Price Level for a Stop-Loss Order

A number of factors, including your risk tolerance and volatility in the security and investment objectives, must be taken into account when determining the best price for stopping loss orders. In order to determine the right price for stopping loss orders, investors often turn to technical analysis tools like support and resistance levels. Specific markets or securities can be studied to understand whether retracements are common. A more active stop loss and reentry strategy is required for securities that show retracements.

Lastly, traders and investors can take advantage of the new opportunities created by seasonal market movements through weekly options trading, which makes it possible to use more regular expiry dates. Although such instruments might be a source of potential returns, traders should consider their risk tolerance and market forecast before implementing Weekly Options in their investing strategies. They are not without risks. To enhance competence and confidence before entering the dynamic world of weekly options trading, seeking professional advice and using Demo accounts may be beneficial.