Saturday, May 23, 2015
As weeklys options are more cost effective way to trade around short-term, premiums are a fraction of the cost of monthly options. You can purchase more contracts for the same total investment when compared to monthly.
I consider the following for my weekly options trades:
- An option strike with a delta of .65 or higher, meaning you make $.65 or more for every dollar move of the underlying. Higher deltas have higher premiums.
- The spread between the bid price and the ask price on an option. I don't enter an option where the spread between the bid and ask is more than $.10. If the spread is too wide when you purchase an option contract you are down the amount of the spread.
- The strike should have some volume and must have open interest of at least 100. I don't buy more than 1 0% of the open contracts. I check the historical information on the option.
- Buy the appropriate time frame option for the strategy, I am trading the options with no intent to purchase the underlying equity. I close the trade if it has premium > $.10 so it is not exercised. If it has no value at expiration, there is no need to close.
- Purchase weekly option that should fit my trade account and risk. It is tempting to go cheap by buying way out-of-the-money strike price options. I buy strikes that (are in-the-money call or puts) fit my available funds. Each strategy has specific requirements.
**Out-of-the-money (OTM) options are comprised entirely of time value or extrinsic value, while a deeply in-themoney (ITM) option is comprised almost entirely of intrinsic value.