Weekly income excites many option traders, and leads them to selling contracts that can potentially give them a super quick return. Guilty of this myself, I know that this strategy can work, however, it is not for everyone. While I have many reasons, in this article, I am going to review my top five which explain why I personally do not feel it is a good idea to sell weekly contracts.
1. Your Position Is Not As Liquid
I am going to share a horror story to explain this risk. While I have not experienced this myself, I had a friend enter a weekly position which she could not close out because there were no bids. A drastic decrease in volume and open interest left her forced to hold on to a position and eventually assume the max loss once the contract was assigned. When you trade weekly options, there is less volume which means less liquidity.
2. You Receive Less Credit
In other words, when you sell weekly options they are much cheeper. As an option seller, you want to find a happy medium between your price and your risk. When selling weeklies, you take on more risk while sacrificing a cheeper price, which does not seem very optimal.
3. You Win Less
While all traders are different, you have a better chance of being on the winning side of an option if you have time on your side. You have to realize that when you sell an option with 7 days until expiration, you have little to no room in managing your position if it goes south. Also, if it goes south, you can expect to realize close to your max loss.
4. You Sacrifice Ideal Breakevens
What do I mean by this? While a bit difficult to understand, I will explain how this looks with a strangle specifically, which is an option strategy that profits when the stock price stays in-between two numbers. In a weekly contract, you may have a 50% chance of profit if the stock price stays in-between $40 and $50. If we extend the duration, we may see the same 50% chance of profit, but now the stock only has to stay in-between $35 and $55. As you can see, there is a narrower range for us to make money if we choose to go with the weekly contract.
5. You Pay More Fees
When you trade weekly contracts, you are closing positions 4 times a month (every week). When you trade monthly contracts, you are closing positions once a month. This means you are paying FOUR TIMES as much in fees as someone who trades monthly contracts. While it may not seem like a lot, this is honestly one of the reasons I switched from trading weeklies to monthly contracts. The fees ADD UP. Assuming you are trading 20 positions with a $1 closing fee, that is the difference between paying $80 in fees per month as opposed to $20.
My Approach
As I mentioned, I have been sucked into weekly options in the past. For me, I liked it because I was able to get in and out of positions quickly. Moving on, I started to realize how patience in the process was much more optimal in the long run. When I started trading monthly options:
- I had a higher win rate as I was able to manage my positions if they were not going well
- I was making more money because I was selling at higher prices
- I was able to relax and not stress about my positions as much because they were much easier to manage
Overall, I do not think trading weeklies is a bad thing, but I think it is important for you to understand the risks involved with doing so. In my next article, I am going to go over my ideal expiration date and how it has worked for me.