International Forecaster Weekly

Weeklies, Not for the Timid

Today I’m going to talk about “weekly” options. Are they good, bad or indifferent? Let’s chat.

Bob Rinear | November 17, 2020

For the second time in a row, I’m not going to talk about the election. I find that funny really, because for several weeks I talked about it and figured people were getting tired of my blather. So my last article was on Gap up and Gap down market opens, and the problems with them.

Wouldn’t you know, I got literally 30+ Emails from folks saying things along this line: “this is the most important election in our lifetime and you stop talking about it to say something about gap opens?????  You need to get back on track!”

So, I can’t win. If I talk about it, I catch hell, and if I don’t I catch hell. Go figure.

But no, I’m not talking election today. I probably will this weekend, but not today. Today I’m going to talk about “weekly” options. Are they good, bad or indifferent? Let’s chat.

Options are a wonderful tool. I use them very often, and they’re a big part of my toolbox. For most people, they simply use them in one of three ways. One way is to buy a call option on a stock you think will rise. Then there’s those that buy “put” options and they’re for stocks you think are going to fall. Finally, there’s the covered call, where you buy a stock, and then sell the right for someone to buy it from you at a higher price.

The bulk, and I mean 85% of all options trades are those 3 basics. But of course, there’s many more ways to use options, such as “naked” selling, straddles, condors, butterflies, you name it. I personally only do calls, puts, covered calls and some naked puts.

Some of you are avid options players, while others consider them “too dangerous” to touch. So, for those of you who are afraid of them, let me say this; buying a call or put option, is no more dangerous at all, than buying a stock itself, if indeed you’re talking short term investing. You manage it like any stock trade, if you buy a call option, expecting the underlying stock to rise and instead it falls, you sell that call option, take the little hit, and move on. Just as you would with a stock that went the wrong way on you.

The typical call option that we employ on an almost daily basis, was begun back in 1973. Before that, there were no options available to retail investors. In 1977, they introduced the standard put option. Those two tools were well received and volumes grew immensely.

Options could be bought and sold freely and in general you had time frames of them expiring monthly, on the third Friday of that designated month. Then came the idea of longer dated options and finally LEAPS, which believe it or not, because it sounds corny, stands for Longterm Equity AnticiPation Securities. These were calls and puts that might not expire for up to 2 years.

Now DeLorean yourself forward 32 years and you find that in 2005, they started a pilot program of “weekly” options. Initially only covering the S&P, over time they spread out and today you can find weeklies on hundreds of stocks and indexes. These instruments start on the Thursday of every week and expire the following Friday, 8 days out.

So yeah, instead of just 12 months of expiring options and all the fun involved, now there’s 52 chances to win or lose in a year. Fun, eh?!

Okay so are they any good? Well, they’re just fine. A more important question is are YOU any good? Because the options will perform properly if you get the direction correct. So that’s all on you.

The intriguing part is that you’re not paying for a month’s worth of time, so if you think the XYZ company is going to soar on their earnings report, you can buy that week’s options on it, and if you’re right, experience quite a bit of leverage. The “bad” part of course is if you get it wrong and XYZ misses, or they just don’t like their report, you don’t have any time to just “wait it out” and hope it recovers. You only get 8 days and that’s in total. If they’re releasing on a Thursday and you buy the option on Wednesday, you’d only have Friday for them to recover a sell off. You’re going to lose some money for sure.

(Note, by the way I NEVER hold over an earnings release) 

They work just like monthlies. You can buy a call, sell a call, buy a put, sell a put, you name it. The only difference is that whatever you expect to happen, has to happen quickly.

So, as you can imagine, there’s a lot of people that play the really volatile stocks using weeklies. When you have a stock like say AMZN, TSLA, etc, that can move 50, 80 points in a day, one well-placed call option can make you a gaggle of money really quickly.

If you watch the weeklies long enough, you can see episodes of people making crazy money on the Friday day of expiration. What happens is that the options expire at the close on Friday. So, if you’re buying an out of the money option ON Friday, it’s cheap, really cheap. But then, if the overall market goes nuts, or there’s sector specific news that helps your sector, all hell can break loose. I’ve seen calls bought at 11 cents Friday morning get sold for 4 dollars by 2 pm.

But I’m going to share with you a strategy I’ve been playing with now for about 3 months, and it’s pretty darned good. What I do is sell a covered call that’s in the money, but with the DESIRE to get called out. Okay I can see the heads tilting going “huh?” 

With the market in an uptrend, the big-time volatile stocks like ZM or NVDA command Monster premiums. So, why not capitalize on those?  Instead of buying them, let’s sell them!

This is simply an example; I did not do this trade.  On Tuesday afternoon, which was a soggy day in market land, ZM was trading at 402.00. So, I pulled up the weekly chain and I see that the Friday 390 call options are 20 bucks.  What if I bought 100 shares of the stock, and then sold that in the money call? 

The strike price is already 12 bucks in the money. Chances are fair that ZM isn’t going to sink under that. So, If I buy the stock at 402 and sell the 390 call, I’m going to get 20 bucks per share, for doing that. If ZM stays above 390 by Friday night, I will be called away, and they’ll take it from me at 390 per share. But that’s okay. I paid 402 and they took it at 390. That’s 12 bucks lower. However, I was paid 20 bucks for the sale of the call. I’m 8 bucks a share to the good.

Or how about NVDA? On Tuesday at about 2 pm it was trading at 536. They would give me 24.00 for selling the 525 call options. So again, buy 100 shares, and sell 1 contract of the 525 calls. Chances are good you’ll get called out, unless the market really decides to drop. Well, if you bought at 536 and they took it from you at 525, you lost 11 bucks. However, you took in 24 for selling the call. 24 minus 11 says you made 13 bucks.

Now I used extreme examples here, for instance quoting Tuesday’s prices. I’ve generally waited until Wednesday to be more sure that the stock is going to get called away and not fall below my strike. But even on less volatile stocks, with just ONE day to expiration, I’ve been able to consistently use this strategy and pocket good money.

Options are a tool, and this tool gives us another option so to speak. Consider watching the weeklies for a while to get a flavor of how they work, and then do some paper trades buying the stock and selling ‘near” in the money calls. You do NOT want to go deep in the money, just near in the money. The premiums they are hoping to charge outright buyers of the calls is often so rich, that by selling the calls instead, you’re sort of beating them at their own game.

Give it a look and let me know what you think.