A really effective options trading method that we have used numerous times now – and which include utilizing the new weekly options that are available – is to find ways to combine them with longer dated options within the same strategy. You can use them (the weekly options) with various dated options – either the regular monthly options – or even with much longer dated options, for example two month out options or even much longer dated LEAP options. You can also use this technique with various option strategies, for example credit spreads, debit spreads, ratio spread, calendar spreads, and all the other ‘go to’ monthly trading strategies.
While you can initially construct trades using the weeklies, what we have round to be very effective is to instead use them as hedges to the trading positions through out the duration of the trade.
Let’s use an example where we place a ‘normal’ monthly income trade – like an iron butterfly or credit spread. Let’s say that during the trade the underlying stock or ETF continues to move against our position until we reach a point where an adjustment can – or should – be made.
However, at the point in the trade where the adjustment can be made – we find ourselves on a Thursday just prior to a holiday weekend – where the stock market is going to be closed on the following Friday – and then of course we have several days (the weekend) where the market is going to be closed as it always is anyway.
Now, normally we could / would adjust this position using our normal ‘monthly’ options – which are the options with the same expiration date as the rest of the options in our position.
However, now – with the availability of the NEW weekly options – we COULD instead utilize the new weekly options that are available – providing us with a number of potential enhancements to the trade.
1. The theta decay in these weekly options will be much greater (faster) potentially allowing us to not only hedge our position as we need to over the long holiday weekend – but also realize more profit much more quickly since the weekly options are decaying at such a higher rate.
2. This type of hedge – or option adjustment – can be cheaper to put on – as the weekly options we are dealing with are cheaper to buy / trade then the longer dated options.
3. This could be considered more of a ‘band-aid’ type of a play – or in other words – it can act as more of a ‘temporary’ hedge and adjustment. For those of you who trade options I am sure you will agree that many times when a trading position reaches a point where an adjustment is necessary, you go ahead and make the adjustment – only to find that almost immediately the underlying turns back around creating a scenario where if the adjustment had never been made at all your position would have been just fine – if not better than where it now stands due to the adjustment. Well, using weekly options can significantly reduce the ‘pain’ in these types of situations.
Now some could argue that using weekly options in this way is not ideal – due to things like: you may not be able to get as much distance from where the stock or ETF is currently trading at – or at least not as far as you might with a longer dated option. But to that I could say: yes but the shorter weekly options will decay at a much more rapid speed and if you place the hedge properly it could be possible to quickly snatch up a nice fast ‘payday’ from the position in an extremely short period of time – and then get completely out of the position (the hedged ‘adjustment’ position) where if you were instead using a longer dated ‘monthly’ option it is very likely you could get ‘stuck’ with that trade for a long period of time.
Bottom line is that this is a simple method that makes a lot of sense – and one which we have used with great success in our option trading and will continue to use and explore. Again, this a strategy that can be used with pretty much ANY option income trading method including iron condors. Of course, you just need to make sure that the underlying you are trading have weekly options available to use.
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