Saturday, May 23, 2015

Consideration for trading weekly options

As weeklys options are more cost effective way to trade around short-term, premiums are a fraction of the cost of monthly options. You can purchase more contracts for the same total investment when compared to monthly.

I consider the following for my weekly options trades:

  1. An option strike with a delta of .65 or higher, meaning you make $.65 or more for every dollar move of the underlying. Higher deltas have higher premiums.
  2. The spread between the bid price and the ask price on an option. I don't enter an option where the spread between the bid and ask is more than $.10. If the spread is too wide when you purchase an option contract you are down the amount of the spread. 
  3. The strike should have some volume and must have open interest of at least 100. I don't buy more than 1 0% of the open contracts. I check the historical information on the option. 
  4. Buy the appropriate time frame option for the strategy, I am trading the options with no intent to purchase the underlying equity. I close the trade if it has premium > $.10 so it is not exercised. If it has no value at expiration, there is no need to close.
  5. Purchase weekly option that should fit my trade account and risk. It is tempting to go cheap by buying way out-of-the-money strike price options. I buy strikes that (are in-the-money call or puts) fit my available funds. Each strategy has specific requirements. 

**Out-of-the-money (OTM) options are comprised entirely of time value or extrinsic value, while a      deeply in-themoney (ITM) option is comprised almost entirely of intrinsic value.