Why Weekly Options Are Like Gambling - Cabot Wealth Network

Why Weekly Options Are Like Gambling

Contrary to popular belief, options trading is a good way to reduce risk. Weekly options? That's more akin to a roll of the dice.

The Martingale strategy may work at the roulette table. Not so much in investing.

When I was a young hotshot, trading on the floor of the Chicago Board of Options Exchange (CBOE), I would make markets in Google (GOOG) and Bank of America (BAC) in the morning, and some days, jet off to Las Vegas to play poker, craps and blackjack in the evening. Those were the days of my youth.

I recently turned 40, and with two young kids at home, gambling on the stock market and at casinos is no longer part of my life.

The Chicago Board of Options Floor, where weekly options are sometimes traded.

Life of the young Jacob

The 40-year-old Jacob

The 40-year-old Jacob

There’s a common misconception that options trading is like gambling. I would strongly push back on that. In fact, if you know how to trade options or can follow and learn from a trader like me, trading in options is not gambling, but in fact, a way to reduce your risk.

That said, I do think that trading weekly options is comparable to walking up to the roulette table in Vegas, choosing a random number, and hoping for a long shot to come through.

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Regular Options vs. Weekly Options

So what are the differences between regular options and weekly options?

In 1973, the Chicago Board of Options Exchange introduced call options. A couple of years later, the CBOE introduced put options. These “regular” call and put options expire on the third Friday of each month. A regular option has at least one month, and often three, six or 12 months until it expires.

In 2005, as options trading became more and more popular, the CBOE created “weekly” options. These options are exactly like regular options, except they exist for only eight days. They are created every Thursday and they expire eight days later, on the following Friday.

The short life of these options is the critical component of weekly options. Because they only exist for a few days, you can buy and sell them for extremely cheap prices. And those cheap prices can create some huge winners and some huge losers.

For example, if I was bullish on Microsoft (MSFT),  I could get bullish exposure by using either weekly options, or regular options.

Let’s take a look at two hypothetical trades (numbers and dates are for example purposes only):

Weekly Options

As I write this, it’s June 17 and Microsoft is trading at 245.

Buy Microsoft (MSFT) April 250 Calls (expiring 6/84) for $3.40.

This trade has a holiday-shortened week until it expires.

My options trading model has the odds of the stock trading at 250 in a couple days at 29%.

If MSFT does not close above 250 on June 24, your entire premium is lost—$340 per call purchased.

If MSFT trades at 253.40 on June 24, you will break even on the trade.

If MSFT trades above 253.40 on June 24, you will make $100 for every $1 the stock trades above 253.40.

The intriguing component of weekly options is that the price of the option is pretty cheap at $3.40. This low price can make weekly options a decent trade for binary events, such as drug trials. And for some traders willing to gamble, weekly options can offer a decent risk/reward.

Regular Options

Buy Microsoft (MSFT) October 250 Calls (expiring 10/21) for $18.40.

This trade has 126 days until it expires.

My options trading model has the odds of the stock trading at 250 on October 21 at 46%.

If MSFT does not close above 250 on October 21, your entire premium is lost—$1,840 per call purchased.

If MSFT trades at 268.40 on October 21, you will break even on the trade.

If MSFT trades above 268.40 on October 21, you will make $100 for every $1 the stock trades above 268.40.

While you are paying more for this regular option, you have much more time for the stock to rally and profit than if you bought the weekly option. And that added time gives you a significantly greater chance of making money on the trade vs. the weekly trade.

When judging how you want to play a stock with options, at the end of the day you need to ask yourself if you are a gambler willing to take the risk on a long shot, or are you willing to pay more for better odds of success.

As I’ve become older and my risk tolerance has dropped, I’ve come to favor slow and steady, high-probability trades. If that sounds like something you’d like to explore with me as your guide, I invite you to subscribe to Cabot Profit Booster, where every Tuesday I execute a new covered call trade based on one of my colleague and growth investing expert Mike Cintolo’s stock picks.

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Have you tried weekly options? What was your experience?

Jacob Mintz

Quick Profits, Controlled Risk

Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader, Cabot Options Trader Pro, and Cabot Profit Booster. He uses calls, puts and covered calls and more to guide investors to quick profits while always controlling risk. Beginners and experts alike can gain from following Jacob’s advice.

Learn More

*This post has been updated from an original version, published in 2017.


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