Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
Massive Stock Market Price Reversion May Be Days or Weeks Away - 22nd Sep 19
How Russia Seized Control of the Uranium Market - 22nd Sep 19
Dow Stock Market Trend Forecast Update - 21st Sep 19
Is Stock Market Price Revaluation Event About To Happen? - 21st Sep 19
Gold Leads, Will the Rest Follow? - 21st Sep 19
Are Cowboys Really Dreaming of... Electric Trucks? - 21st Sep 19
Gold among Negative-Yielding Bonds - 20th Sep 19
Panicky Fed Flooding Overnight Markets with Cash - 20th Sep 19
Uber Stock Price Will Crash on November 6 - 20th Sep 19
Semiconductor Stocks Sector Market & Economic Leader - 20th Sep 19
Learning Artificial Intelligence - What is a Neural Network? - 20th Sep 19
Precious Metals Setting Up Another Momentum Base/Bottom - 20th Sep 19
Small Marketing Budget? No Problem! - 20th Sep 19
The Many Forex Trading Opportunities the Fed Day Has Dealt Us - 19th Sep 19
Fed Cuts Interest Rates and Gold Drops. Again - 19th Sep 19
Silver Still Cheap Relative to Gold, Trend Forecast Update Video - 19th Sep 19
Baby Boomers Are the Worst Investors in the World - 19th Sep 19
Your $1,229 FREE Tticket to Elliott Market Analysis & Trading Set-ups - 19th Sep 19
Is The Stock Market Other Shoe About To Drop With Fed News? - 19th Sep 19
Bitcoin Price 2019 Trend Current State - 18th Sep 19
No More Realtors… These Start-ups Will Buy Your House in Less than 20 Days - 18th Sep 19
Gold Bugs And Manipulation Theorists Unite – Another “Manipulation” Indictment - 18th Sep 19
Central Bankers' Desperate Grab for Power - 18th Sep 19
Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? - 18th Sep 19
Importance Of Internal Rate Of Return For A Business - 18th Sep 19
Gold Bull Market Ultimate Upside Target - 17th Sep 19
Gold Spikes on the Saudi Oil Attacks: Can It Last? - 17th Sep 19
Stock Market VIX To Begin A New Uptrend and What it Means - 17th Sep 19
Philippines, China and US: Joint Exploration Vs Rearmament and Nuclear Weapons - 17th Sep 19
What Are The Real Upside Targets For Crude Oil Price Post Drone Attack? - 17th Sep 19
Curse of Technology Weapons - 17th Sep 19
Media Hypes Recession Whilst Trump Proposes a Tax on Savings - 17th Sep 19
Understanding Ways To Stretch Your Investments Further - 17th Sep 19
Trading Natural Gas As The Season Changes - 16th Sep 19
Cameco Crash, Uranium Sector Won’t Catch a break - 16th Sep 19
These Indicators Point to an Early 2020 Economic Downturn - 16th Sep 19
Gold When Global Insanity Prevails - 16th Sep 19
Stock Market Looking Toppy - 16th Sep 19
Is the Stocks Bull Market Nearing an End? - 16th Sep 19
US Stock Market Indexes Continue to Rally Within A Defined Range - 16th Sep 19
What If Gold Is NOT In A New Bull Market? - 16th Sep 19
A History Lesson For Pundits Who Don’t Believe Stocks Are Overvalued - 16th Sep 19
The Disconnect Between Millennials and Real Estate - 16th Sep 19
Tech Giants Will Crash in the Next Stock Market Downturn - 15th Sep 19
Will Draghi’s Swan Song Revive the Eurozone? And Gold? - 15th Sep 19
The Race to Depreciate Fiat Currencies Is Accelerating - 15th Sep 19
Can Crypto casino beat Hybrid casino - 15th Sep 19
British Pound GBP vs Brexit Chaos Timeline - 14th Sep 19
Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - 14th Sep 19
War Gaming the US-China Trade War - 14th Sep 19
Buying a Budgie, Parakeet for the First Time from a Pet Shop - Jollyes UK - 14th Sep 19
Crude Oil Price Setting Up For A Downside Price Rotation - 13th Sep 19
A “Looming” Recession Is a Gold Golden Opportunity - 13th Sep 19
Is 2019 Similar to 2007? What Does It Mean For Gold? - 13th Sep 19
How Did the Philippines Establish Itself as a World Leader in Call Centre Outsourcing? - 13th Sep 19
UK General Election Forecast 2019 - Betting Market Odds - 13th Sep 19
Energy Sector Reaches Key Low Point – Start Looking For The Next Move - 13th Sep 19
Weakening Shale Productivity "VERY Bullish" For Oil Prices - 13th Sep 19
Stock Market Dow to 38,000 by 2022 - 13th Sep 19 - readtheticker
Gold under NIRP? | Negative Interest Rates vs Bullion - 12th Sep 19
Land Rover Discovery Sport Brake Pads and Discs's Replace, Dealer Check and Cost - 12th Sep 19
Stock Market Crash Black Swan Event Set Up Sept 12th? - 12th Sep 19
Increased Pension Liabilities During the Coming Stock Market Crash - 12th Sep 19
Gold at Support: the Upcoming Move - 12th Sep 19
Precious Metals, US Dollar, Stocks – How It All Relates – Part II - 12th Sep 19

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

How to Trade Weekly Options

InvestorEducation / Options & Warrants Apr 26, 2012 - 08:55 AM GMT

By: Money_Morning

InvestorEducation

Best Financial Markets Analysis ArticleLarry D. Spears writes: To loosely paraphrase Robert Burns, the best-laid plans of mice and stock traders sometimes go awry.

But with some creative use of weekly options, that doesn't necessarily mean you have to take your losses.

Here's an example of what I mean.


Just under two weeks ago, we suggested a "short iron condor" as a possible short-term strategy for playing the release of first-quarter earnings reports for some of the leading financial stocks, using J.P. Morgan Chase (NYSE: JPM) as a specific example.

As it turned out, JPM's earnings handily topped the estimates - coming in at $1.31 per share versus a projected $1.14, on revenues of $26.7 billion ($24.4 billion had been predicted).

That should have sent the stock nicely higher, giving us a quick gain on our condor - and JPM did indeed try to rally - but then our best-laid plans took a wrong turn.

The broad market turned sharply lower that Friday, with the Dow Jones Industrials dropping 136.99 points and the S&P 500 losing 17.31, dragging J.P. Morgan along with it.

Long story short, over the next five days JPM see-sawed higher and lower - but save for a few moments on Thursday, it never moved out of our $43-$45 maximum-loss range. The trade went south.

But had you been on your toes, you would have noticed this about JPM: In spite of the pressure from a weak overall market, the stock demonstrated strong technical support at the $43-a-share level. Both times it tested $43, it bounced quickly back - a pattern it repeated Monday, when it ignored the broad market sell-off and rapidly rebounded from a lower gap opening near $42.

The rest of this week, it's again traded solidly above $43 a share. In fact, a quick look at the long-term chart shows that - with the exception of Monday - JPM hasn't closed below $43 since March 12th. And, given the healthy earnings and a "powerful buy" rating last Thursday from Zacks Investment Research, it probably won't close below that level again.

At least not in the next week or two...

That's important because J.P. Morgan is one of the 60 or so individual stocks (plus 30 indexes and ETFs) on which "weekly" options are traded.

It's through the use of these relatively new trading vehicles that we can quickly recover the loss we just suffered on our JPM iron condor trade.

A Weekly Options Primer
Weekly options on equities are less than two years old, but they are already highly popular for a variety of purposes, ranging from hedging against short-term pullbacks to speculating on quick price reversals, either up or down.

Perhaps the most popular strategy, however, is selling "weeklys" to generate a steady income stream - or, in our case, offset earlier short-term losses.

For those unfamiliar with them, weekly options were introduced by and trade on the Chicago Board Options Exchange (CBOE). They come in both puts and calls, like regular monthly or quarterly options, and have a range of strike prices surrounding the current price of the underlying stock.

However, they have a lifespan of just eight calendar days - being introduced on Thursday and expiring on Friday of the following week.

For trading purposes, they're designated as Wk1, Wk2, Wk4 and, if a month has five Fridays, Wk5. No weeklys are created expiring on the third Friday of the month since that's when the regular monthly options expire.

Now back to our loss-recovery strategy.

All it involves is selling an out-of-the-money weekly option representing a move opposite the price move you expect in the underlying stock.

In other words, if you think the stock is likely to fall in the next week, you sell the weekly call option - or, if you think the stock price will rise, you sell the weekly put option.

If the stock price moves as you expect ­- or even stays flat - the time value in the option premium will quickly erode, the option will expire the following Friday and you'll get to keep the entire amount you received for selling it.

The risk, of course, is that the stock will move counter to what you expect, putting the option you sold in the money and forcing you to buy it back before expiration - though, given the rapid time-value erosion, that doesn't necessarily mean you'll take a loss on the trade.

The risk is also mitigated by the option's short lifespan - as well as by the fact that you should never use this strategy unless you have a solid reason to think the stock will move as expected, such as JPM's strong technical support at the $43 level.

Even so, you'll have to post a margin deposit to do the trade, the amount of which you can estimate by using the CBOE's "Option Margin Calculator."

(Note: If you want to avoid posting the full margin requirement, you can cover part of it by buying an option of the same type, but further out of the money. That option should cost only pennies, and you'll only have to post the difference between the two strike prices, less the net premium you receive for the option you sell.)

Using Weekly Options to Recover Your Losses
Had you been aware of this play when you closed your JPM short iron condor last Thursday, you could have immediately sold the JPM AprilWk4 $43 put.

With JPM at $43.22, that put was trading around 55 cents, or $55 per full 100-share contract, enough to offset nearly all of the 82-cent loss you took on the condor. The margin requirement for the trade would have been about $842, which seems a bit steep - but if you get to keep the full $55, that's a return of 6.5% in just eight days.

Obviously, it's too late to do that now. By the time you read this, the AprilWk4 put premium will likely be less than a quarter of last Thursday's levels - even if JPM's price hasn't changed at all.

But that's the nice thing about weekly options - you get another chance to sell the appropriate JPM MayWk1 put today or tomorrow. Merely adjust the strike price accordingly, based on the underlying stock price at the time.

Then, keep repeating the strategy every week. You'll quickly recover your full condor loss, after which you can start generating a regular weekly income from J.P. Morgan - without even owning the stock.

As an alternative to buying back the put if JPM does move against you, you can choose to let it be exercised, forcing you to buy the stock at $43 a share - less than where it's trading now.

You can also use this strategy with any of the other stocks on which weekly options trade, generating income from them for far less than you'd have to invest to actually buy the shares.

Source :http://moneymorning.com/2012/04/26/how-to-trade-weekly-options/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules