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.
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.
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.
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):
As I write this, it’s January 5 and Microsoft is trading at 217.25
Buy Microsoft (MSFT) January 225 Calls (expiring 1/15) for $1.40.
This trade has just 10 days until it expires.
My options trading model has the odds of the stock trading at 225 in a week at 23%.
If MSFT does not close above 225 on January 15, your entire premium is lost—$140 per call purchased.
If MSFT trades at 226.40 on January 15, you will break even on the trade.
If MSFT trades above 226.40 on January 15, you will make $100 for every $1 the stock trades above 226.40.
The intriguing component of weekly options is that the price of the option is pretty cheap at $1.40. 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 though it would require an approximate 3.3% move in the stock for the traders to profit.
Buy Microsoft (MSFT) April 225 Calls (expiring 4/16) for $10.20.
This trade has 101 days until it expires.
My options trading model has the odds of the stock trading at 225 on April 16 at 45%.
If MSFT does not close above 225 on April 16, your entire premium is lost—$1,020 per call purchased.
If MSFT trades at 235.20 on April 16, you will break even on the trade.
If MSFT trades above 235.20 on April 16, you will make $100 for every $1 the stock trades above 235.20
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.
To learn more, click here.
Have you tried weekly options? What was your experience?
Jacob Mintz is a professional options trader and Chief Analyst of Cabot Options Trader. He uses calls, puts and covered calls 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.