(07/20/11) 4 Tips for Trading Weekly Options

Weekly options make every Friday an expiration day, offering traders opportunities to profit each week. Here are four important strategy adjustments designed to promote safer, more successful trading.

The options trading world is an ever-growing, ever-changing one. One of the biggest changes in recent years has been the advent and growth of weekly options on the major option exchanges, as previously, most all options were on a monthly expiration with quarterly cycles, always including a front month and second month.

So how do we utilize this added tool in the option trader's arsenal, and how do we address expiration weeks in general?

First, a little background: Weekly options started trading on the Chicago Board Options Exchange (CBOE) in 2005 and generally have the same contract specifications and similar pricing as standard options.

Just this month, the CBOE established that all new weekly options listed on the CBOE will begin trading on Thursdays and expire the following Friday. This provides uniformity and also allows traders to easily "roll" weekly options from one expiration to another.

Weekly options are primarily available on the major indices and most liquid stocks, but the list of available choices continues to grow. Earlier this month, the CBOE added new weekly options on several exchange traded funds (ETFs) and individual equities. The current full list of available weekly options is available on the CBOE Web site.

Similar to the growth in ETFs and options in general, trading volume in weekly options continues to grow. You can see on the chart below (data from the CBOE), the growth in weekly option volume both as an absolute and as a share of total volume.

Click to Enlarge

How do we do this in terms of expiration weeks and weekly options?

Here are some of our rules and tips:

When trading vehicles that expire within a few days, shorten the time frame on your charts and systems for quicker trade signals. I prefer hourly and 15-minute charts for these short-term trades
When approaching a monthly or weekly expiration, I focus on the five to seven days before expiration and utilize high-Delta (80%+), deep-in-the-money options. This gives us quite a bit of bang for the buck, as there is very little time premium in these options
The limited universe of the top weekly, liquid names allows for a strong focus on a specific basket of underlying equities, including the volatile, high-dollar stocks like Apple (AAPL), Google (GOOG), and Baidu.com (BIDU), which often offer great swings for technical traders
But in addition, by utilizing monthly options during or just before expiration week, we also get a similar effect to trading weekly options. Specifically, we recently just had an extreme options trade on Randgold Resources (GOLD) just ahead of a monthly expiration week that we entered and closed quickly for a 50%+ profit.