I don’t know if you agree……
…..but it seems like everywhere you turn, the term “income trading” is being tossed around, amongst option educators…
Hell, I just received an email from one saying, “Learn to use options for weekly and monthly income generation”.
Let’s be real, we both know it’s a simply marketing ploy to get your attention. With that said, “income trading” has become very popular, especially for those who trade weekly options. Let’s face it, the allure of selling options and collecting option premium every single week sounds pretty sweet!
But there’s one thing…
…in most situations, selling weekly options are a lot more riskier than monthly options.
If you’ve read Fearless Investing With Options, you know that I don’t believe in randomly selling option premium…week in and week out.
I always cringe when I hear stories about traders who sell the same options on the same underlying every week.
For example, I’ve heard of some traders who sell calls naked on Apple every Thursday…hoping to buy back their options (or have them expire worthless) on Friday.
As you know, on expiration day, options will either close in the money or expire worthless.
With that said, implied volatility shouldn’t be your main concern during the last several days before expiration.
More specifically, it’s important to pay attention to the Gamma of the options you’re in.
Gamma is an option Greek which refers to the rate of change in Delta for each $1 move in the underlying. Gamma is the relationship of the change in Delta as a stock price changes.
Options that have more time to expiration (like monthlies) are less sensitive to Gamma, but options that are close to expiration will be much more sensitive to Gamma.
For example, on Friday, February 13th, 2015, Apple was trading around $125.81 with less than two hours till expiration. The at-the-money $126 calls had a value of around $0.20. Some traders might have seen this an easy opportunity to collect $0.20, by selling premium.
However, it’s never that easy…in fact, Apple rallied over a dollar and closed above $127 a share. Those options went from $0.20 to over $1 and change. Imagine, stepping out for an hour or so….only coming back to see the position go against you for a large loss on only a tiny 1% move!!!
Most of the time…the stock doesn’t move and those options do expire worthless. That is why it doesn’t make sense to be a buyer of those type of options.
When you’re selling options, you have to be strategic.
You don’t want to sell options because you think it’s easy money. Also, you need to factor in the transaction costs of cheap options. That is, commissions and what you’ll lose on the bid/ask spread. This will reduce the overall premium you’ve collected.
Not only that, it makes the decision to buy back your options a lot more difficult. You see, after you’ve included your transaction costs, you might be compelled to hold the position longer, in hopes, to collect all the premium. But if you’ve read Greater Profits In Less Time On Your Option Trades, you’ll now that is not the right approach.
Imagine being naked short near term options and the stock gets halted. Maybe, they’re involved in a buyout, have news from a pending legal action, pre-release their earnings report or whatever the case may be. You simply don’t have the time to make adjustments…worst of all, you weren’t compensated enough to take the risk.
That’s why so many premium sellers end up struggling to keep their profits when they are trading weekly options. This trade might work for a little while, however, they’ll underestimate the power of Gamma… and not react quickly enough to make the adjustment.
This usually results in a large drawdown. You see, if you decide to trade weekly options…you have be ready to make a move quickly if something happens…whether that’s taking profits or adjusting the position.
This isn’t “income” that is owed to you.
In fact, you might have to work for it. With that said, you’ve got to be active, meaning, you have to monitor your positions a lot more than you would if you were trading longer term options.
Now, I do believe there are opportunities to be strategic with weekly options. In fact, there are specific situations where I rely on weekly options to express my market opinion.
Here’s some good news…
A couple years ago I wrote an ebook on weekly options…it teaches you some of my favorite approaches…what I learned from the winners and losers…stuff that has proven itself to work…over and over again.
If you’re new to weekly options…you’ll get right up to speed on some of the most powerful option strategies for trading them…how they work and when to apply them.
In the past, I’ve sold this 34-page ebook for more than $50 on this site. However, today you can download the updated version of it for FREE.
You know…I’ve recently went back and made updates to it…to have it better reflect the present market environment, as well as, fine tune and highlight the most important stuff I’ve learned.
When I first wrote this, there were only a handful of weekly options available at the time. Now, there are several hundred that you can trade, ranging from ETFs to stocks.
Here’s the bad news…
I’m not sure how long I’ll be offering this ebook for free, so make sure to get it now before something comes up and I change my mind.
After you instantly download this free 34-page ebook on weekly option you’ll learn: