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The explosion in popularity of weekly options has allowed more traders to take advantage of volatility in high priced stocks such as Google NASDAQ: These short-term instruments have helped to solve a conundrum that has faced traders as the prices of some stocks have soared — namely how to trade these names without putting up the large amount of capital required to enter a position. Trading stocks such as Google and Apple in even one hundred share lots is an impossibility for many traders.
These are two of the most popular trading stocks in the market, yet a larger account size is required to trade the equity. For this reason, many traders have turned to weekly options to capitalize on the volatility in these and similar names.
These instruments have become ever more liquid and provide expiration opportunities every week. Weekly options are typically listed on Thursdays and expire on the following Friday. While there are a wide variety of different strategies that can be employed using weekly options from hedging to spreading, they also are great instruments for gaining directional exposure.
In general, any type of strategy that can be executed using standard options contracts can also be implemented using the weeklies. In addition to popular stocks, weekly options also can be bought and sold on indices and ETFs. The primary advantage to using weekly options for small speculators is the large amount of leverage provided and the small initial capital outlay.
The amount of capital needed to trade options that expire on a weekly basis is a fraction of what is required to trade the underlying stocks. Given the nature of options, however, the risk and reward is also greater on an absolute basis. In other words, it is not uncommon to lose your entire investment when making a short-term, directional bet using weekly options.
Traders should understand the unique risk and reward properties of weekly options before wading into this exciting market. As with all trading strategies , the key to being profitable using weekly options is in position sizing and risk management. Given the volatility of these products, it is important that traders use an appropriate position size on each trade relative to the size of their account. For example, it would be imprudent to bet 50 percent of an account on one trade.
Improper position sizing and risk management is the number one reason why most traders fail. The potential risks of these mistakes are amplified in the weekly options market. It is also essential to develop some sort of niche which provides an edge over other traders in the market. For example, instead of purchasing options, a trader could sell weekly options in order to capitalize on the rapidly decaying time premium inherent in this product.
In sum, traders who are frustrated by the large capital requirements to trade leading stocks such as Apple and Google may find that their strategy can be replicated using weekly options with a considerably lower capital outlay. Furthermore, the key to making money in weekly options is a robust system to manage position size and risk, in combination with a quantifiable and repeatable edge. This article is provided for educational purposes only and is not considered to be a recommendation or endorsement of any trading strategy.
The author is not affiliated with Lightspeed Trading and the content and perspective is solely attributed to the author. Navigating Taxes as an Active Trader. Large Cap Momentum Trading. Open an Account Try a Demo.