Selling weekly options over long term positions - the story THEY won’t tell you

Hand with keySince the advent of weekly options over many US stocks and ETFS, the ‘make some bucks out of the punters’ brigade have seized this opportunity to rip some more cash out your pocket with half-story promises and a fantasy of riches and abundance.

To suggest selling weekly options and claim that it’s easy is slightly misleading.

The key thing with this and the many other strategies of the ‘covered call’ variety is effective management of the sold call. It is NOT, however, the key to infinite wealth and comes with its own set of challenges.

Diagonal call or calendar spreads are something I have taught for a number of years and whether they are monthly or weekly, the process is similar. There is, of course, truth in the statement that premium per week is better (if multiplied x4) than a standard monthly premium, but there are seven things you need to be aware of before you dive into this interesting investment idea:

i.              Theoretically, weekly options sound great, but they are more difficult to manage in a fast moving situation as you haven’t got the comfortable buffer of a large premium should you want to move the option with a big move in the underlying.

ii.             There are times when delay/writing the sell of your sell (and let the underlying move up) is going to be far more lucrative than selling a call straight away – again not hard, but a system issue

iii.            There are times when it is wise at the end of an options period to get out and have your capital working in another opportunity – again not hard, but a system issue

iv.           There is a potential (and often) significant margin issue to deal with once you start selling options below a longer term bought call (or vice versa in the case of a long term put) – not hard, but obviously you don’t want to be making decisions on margin issues rather than the technically correct thing to do

v.            There is merit in having a mix of positions both ways, but your decision to allocate long versus short should rarely be 50/50. Some simple rules in a good system could give clues as to the right mix

vi.           Correct strike price placement of your longer term positions is crucial

vii.          There are markets where this strategy is NOT suitable (incidentally, the last year or so has been great for this type of strategy). Furthermore, I would question that trading one strategy ONLY is a great move, although I’m coaching a guy based in the US at the moment and he’s absolutely ‘nailing it’.

Explore it…by all means! Test it out on paper before you trade it of course.

See you at the next options open trading room session. Go to http://hawkeyeoptions.com/pages/room/

And of course email me at any time at mike@hawkeyetraders.com

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