We’ll take a look at some of the bad things when it comes to trading weekly options or basically some of the negatives.
I’ll mention a few positives as well but this video will concentrate on some of the negatives which are basically the risks that you’ll have when dealing with some of the weekly options and things to be aware of.
A lot of people want to get into weeklies or trading weekly options because they’re able to trade very often and very quickly.
I’ve got some sample positions on all over the place and that makes it really nice when you’re trading weekly.
Some stocks don’t have as many weeklies like Fiverr.
But many stocks like Amazon have a lot of weeklies and that allows you to trade just more often and spread out your risk a little bit more.
Now what are some of the downsides and problems with trading weeklies?
There’s two big issues with weeklies at least the ones that I think are important for you to understand.
Number one is the price risk.
For example if you’re looking at trading weeklies on an iron condor, your iron condor might look like wide enough.
Whereas if you’re dealing with the same iron condor at 10 delta another 10 delta and if we do 10 delta in another duration around 40 days out that duration might be much wider.
So you basically get a lot more room in range for the same probability so you’ve got range which basically means when you’re dealing with weeklies you’ve got price risk.
The good news about this is you don’t have volatility risk.
Why is that the case?
Well if we take a look at doing a weekly and I go hop on over a corner for you, if we go into something like a 10-day trade on Amazon and I’ll bring this up and we’ll do an iron condor we will aim for 10 delta over here roughly we’ll do 3050 and 3000.
I’ll sell this and then I’ll go kind of to that same area on the other side maybe about a 20 delta just again for conversation sake we’ll go 3350 and on this one will be a 20 delta here 23 delta and 3400.
I’m spreading it out a little bit more because as we move this to another expiration there will be more likely to have strikes.
I’ve got this iron condor which is uneven but give us a decent range.
Hopefully this will work in the in the future but look what I want you to do is look at the theta and the vega.
The theta is almost very close to the vega and what you’re seeing is if I have a vega problem my theta is very strong and powerful and it can make it up so I don’t really have a big issue with vega anymore because the theta is just so strong.
However from a pricing standpoint, look at the range that I have.
I’ve got this range and now what I’m going to do is do another iron condor and change the duration to November.
Look at the credit I receive in this iron condor so one iron condor I’m making this much, the other one I’m making that much more.
These are the same strikes.
If I wanted the same credit here as the other one I’m able to get wider so this allows me to take the second iron condor and really shift the prices much more.
So if I’m looking at kind of that same delta and I’m just going to kind of rough estimate it but let’s just go again 50 points out here and 50 points out there.
As you can see I’m already getting a lot wider and I can go another 50 points.
And then if I go on the call side the same thing, something like that you can see I’m just getting wide.
As you go further out in duration you can get much wider and that allows you to basically not worry about the volatility risk.
However, the issue is you’ve got price risk.
When you’re trading that shorter duration you basically have price risk.
The other thing that you have with weeklies is imagine you’re doing a trade like every five days or 10 days; you’re basically repeating your trades and you’ve got a lot of trades going on.
Now this may not sound like a bad thing but you are more active which does add into commissions and time for management.
Maybe to manage a 40-day position across 40 days may take you three hours.
Depending on if you’re looking at charts, you’re debating things, it may take you three hours when it comes to managing weeklies across a month.
A month worth of trades may take you maybe like six or seven hours.
So usually with weeklies there’s much more to do because you got to put on the trade, you got to set up the trade ,you got to close the trade so for every trade there’s like three to five times more work for every single one of these.
Whereas for a 40 day, you just let it sit so the amount of trades and the amount of commissions starts to add up and the amount of time for the management side.
That’s another huge issue and problem that most people just don’t get and it’s kind of expected on the commission side but there’s a lot of things you have to you know keep an eye on.
You have to focus on the screen more because you do have a little more of this price risk that maybe goes down, you sell some more puts then it snaps up maybe you take off the profit on the puts so you’re just managing it a little bit more actively.
That might be good because you’re compounding things.
That’s a nice positive and a good win but the downside of course is it just takes up more time and commissions but it allows you to compound things quicker because of that fast theta.
So as a seller when you’re selling things you’re allowed to make more theta or premium but that also means you have an acceleration of risk.
Keep that in mind that when you really look at these things your theta and time decays quicker but your risk also increases and that’s something that you have to think about as you’re doing these weekly trades.
