I consider the expansion of Weekly Options Expirations to be the most exciting development in the financial markets. Currently, there are over 500 assets that have weekly options expirations. These specific markets create tremendous opportunities for traders who are option savvy.
Options are contracts between two parties that are good for a specific period of time. Buyers of options have limited risk. Sellers of options are creating obligations in exchange for the premium which they receive. All options are deteriorating assets because they have a known expiration date. Traders who buy options going into options expiration control huge blocks of stock for the premium which they pay. This premium can be pennies on the dollar, and should a big move result the leverage is massive.
Traders who sell options and collect the premium exploit the decaying characteristic of the options value and use the financial markets as a means of creating predictable income.
The fastest way to understand options is to think of them as price insurance agreements. Imagine a large institutional portfolio that is very concerned about declining prices. They utilize the options market as a means of minimizing their risk exposure to the underlying assets in their portfolio. This is often referred to as hedging and it involves the buying and selling of options depending upon how much risk they are looking to minimize.
Many investors and traders avoid options as they consider them to be too difficult to understand. Words like “risky” are sometimes used by journalists in the financial media who often only look at one side of the equation. In this article we will explore the expansion of Weekly Options Expirations to more than 500 stocks, indexes and ETF’s and present some of the opportunities they offer to the trading community.
How much do you value your opinion?
You have a feeling about what the current trend in the market is and where you think it would be considered overpriced. While you opinion might be very valid, the expansion of weekly options allows you to compare your opinion to the quantifiable value in option pricing.
Historically this basic perspective was created by analysts, economists on a quarterly basis. Macro-economic data would be analyzed, digested, and evaluated. The options markets evolved specifically to address this flow of information. However, as the online world grew, and communication became more and more frictionless what markets have seen is that change happens faster and faster. This “change “can be mathematically measured in terms of the volatility that an asset exhibits.
The options markets have evolved specifically to be able to assist traders with the greater risk that is associated with greater volatility in the rapidly changing world.
Currently, here are a handful of Stock Index Weekly Options expirations contracts:
Weekly Options Chain Quote Google Finance Stock Quote
What makes these contracts worthy of your attention is that as options expirations become more and more common, essentially, we are looking at a greater multitude of ways that traders can manage and transfer risk.
Let me explain, using the SPY contract.
SPY is the acronym of the SPDR S&P 500 ETF Trust. Currently, this very popular stock index has options which expire on Mondays, Wednesday, and Fridays. Before the end of the year, they will be releasing new contracts which also expire on Tuesday and Thursday. This means that every day of the trading week, Monday through Friday there will be an options expiration in SPY.
Why is this important?
One word. RISK.
The options markets price risk through the premiums that are charged for buying and selling the underlying options contract. Therefore, this development to weekly and daily options expirations are a means of quantifying risk daily for market participants.
Let’s step out of the theoretical world into what this means for traders.
SPY is currently trading at $425.
The following table is a listing of all weekly options prices for the $425 call for the next 6 weeks.
Look at the premiums charged, the number of days left in the option and how much that premium will decay daily. This is the same strike price. What you are looking at is the cost of time.
There are numerous ways you can analyze this pricing table. One of the most basic ways is simply comparing option premiums to the previous week to see how much premium and time decay will occur over a 7-day period.
Here is a simple chart of what the current time decay on each contract looks like on a per day basis.
Simply observe what is most obvious in that graph. The front contracts are decaying much faster than the back contracts.
Look at the premiums charged, the number of days left in the option and how much that premium will decay daily. This is the same strike price. What you are looking at is the cost of time.
The front contract is losing $2.84 per day in time value, the second contract is only losing $.956 per day. If you sell the front end and buy the second contract you are capturing time to the tune of $1.88 per day. Since an options contract represents 100 shares that works out to be $188 per day.
Seems like an obvious opportunity to buy the option that is decaying slower and sell the option that is decaying fastest. That spread could seem like an effective way to capture time value and minimize risk.
The one major factor that I try to focus on when I teach options is thinking of options premium as RENT. There are times you want to pay the rent and there are times when you want to be the landlord and collect the rent. This is clearly in the domain of risk management. My observation is that the landlords in the markets are usually much more concerned with risk management. The speculators are the tenants who are always swinging for the fences. You can draw your own conclusions as to who does better. My life experience tells me that the landlords are significantly wealthier than the tenants. This should serve as motivation for you to study and thoroughly understand the risks, rewards, and realities of options trading.
But besides the RENT premium payment we also need to look at future expectations in the market. Everybody is entitled to an opinion but to be effective we want to be data driven. Here is a chart of the percentage change in price we have seen on SPY week over week over the past year.
The biggest UP week was 6.11%.
The biggest down week was -5.5%.
There were 24 up weeks.
There were 28 down weeks.
But here is the statistic that gets me super excited about SELLING premium going into options expiration: 43 out of 52 weeks the market moved less than 2% higher. Stated another way, 82% of the time the market did not move up 2.%.
48 out of 52 weeks the market moved less than 2.5% higher. That is 92% of the time.
So, we can conclude that the LANDLORD who collected rent on options strike prices 2% or higher than the previous weeks closing price saw those options expire worthless greater than 82% of the time.
That sounds like incredible probabilities to me. As long as the LANDLORD could cut losses on the 17% of trades that exceeded that 2% barrier, they have quite a powerful income-producing strategy from the weekly options markets.
I’m not advocating selling options naked. We are not financial advisors.
I’m advocating that you study option combination and spread strategies to always make sure that you have the worst-case scenario covered. There are many, many tactics and strategies used to capture time.
Now imagine this kind of opportunity being present in over 500 different stocks, indexes and ETF’s!
The power of options trading boils down to appreciating probabilities of success.
Any trade has five outcomes.
- You make money if the market goes up a lot.
- You make money if the market goes up a little.
- You make money if the market stays the same.
- You make money if the market goes down a little.
- You make money if the market goes down a lot.
With weekly options it is very possible to create strategies that hypothetically puts the probabilities overwhelmingly in your favor. You can do this by being data driven and harnessing the power of artificial intelligence.
In other words, as Power Traders like to say:
“Follow the slope of the predictive blue line.” When the predictive blue line turns DOWN it is a wonderful opportunity to sell call options. When the predictive blue line turns up it is a wonderful opportunity to sell put options.
This is the power and simplicity that has kept Power Traders on the right side of the right trend at the right time.
Finding value is becoming a completely consuming activity on the part of traders and investors. The target moves quickly based upon too many factors that remain unseen to the naked eye.
It’s all about getting on the right side, of the right trend at the right time.
Most traders have problems with the timing of their trades.
If you want to win, it’s all about who has the best tools. Artificial intelligence excels at keeping traders on the right side of the right trend at the right time.
Let’s get candid here:
• The market is brutally honest – there are winners and losers.
• It’s very black and white.
If you need a friend, get a dog.
• If you are going to win, someone else must lose.
• If survival of the fittest makes you uneasy, stay out of the financial markets.
We live in unique times. The Printing Press is diluting the value of your money.
Everyone is aware that if the money supply grows 20% you must grow your portfolio by that amount just to break even when you look at your purchasing power.
Since artificial intelligence has beaten humans in Poker, Chess, Jeopardy and Go! do you really think trading is any different?
How do you think your investment portfolio compares when pitted against artificial intelligence?
Are you capable of finding those markets with the best risk/reward ratios out of the thousands of trading opportunities that exist?
Knowledge. Useful knowledge. And its application is what A.I. delivers.
You should find out. Join us for a FREE Live Training.
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It’s not magic. It’s machine learning.
Make it count.
THERE IS A SUBSTANTIAL RISK OF LOSS ASSOCIATED WITH TRADING. ONLY RISK CAPITAL SHOULD BE USED TO TRADE. TRADING STOCKS, FUTURES, OPTIONS, FOREX, AND ETFs IS NOT SUITABLE FOR EVERYONE.IMPORTANT NOTICE!
DISCLAIMER: STOCKS, FUTURES, OPTIONS, ETFs AND CURRENCY TRADING ALL HAVE LARGE POTENTIAL REWARDS, BUT THEY ALSO HAVE LARGE POTENTIAL RISK. YOU MUST BE AWARE OF THE RISKS AND BE WILLING TO ACCEPT THEM IN ORDER TO INVEST IN THESE MARKETS. DON’T TRADE WITH MONEY YOU CAN’T AFFORD TO LOSE. THIS ARTICLE AND WEBSITE IS NEITHER A SOLICITATION NOR AN OFFER TO BUY/SELL FUTURES, OPTIONS, STOCKS, OR CURRENCIES. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE DISCUSSED ON THIS ARTICLE OR WEBSITE. THE PAST PERFORMANCE OF ANY TRADING SYSTEM OR METHODOLOGY IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. CFTC RULE 4.41 – HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.
