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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: GOOG) and Apple (NASDAQ: AAPL). 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. At current prices, for example, 100 shares of Google requires around $66,000 in buying power and Apple, $59,000. Compare that to only $500 to $1500 required to buy at the money calls and puts which control the same amount of shares. That’s about 98% less capital required.
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.
According to CBOE data, volume has exploded in these products over the last two years and they now account for around 18 percent of the CBOE’s monthly average daily volume. 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.
On the other hand, it is also possible to double or triple your money in a week’s time if a directional bet turns out to be correct. 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. Traders who have developed the ability to make strong risk/reward bets on a stock’s direction can also be successful using weekly options.
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.
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Posted in: Options, Markets, Trading Ideas