one of the most common questions i get
asked is which is better to trade in
weekly or monthly options in this video
i answered that question
hello everyone and welcome back to my
life for learning my name is randy perez
please know that i am not a financial
advisor and this video is not meant to
be investment advice of any kind
i am however a 22 plus year stock and
option trader as well as real estate
investor before we get started
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let's get started in this video i
address one of the most common questions
i get asked about
it's quite possibly the number one
question i get asked
which is better selling weekly or
monthly options
let's go through the advantages and
disadvantages of each of these different
time frames and at the very end of this
video
i'm going to share with you which time
frame is my favorite and why that's the
case
in october 2005 the chicago board of
options exchange
introduced weekly options to traders
since that time their popularity has
been increasing
in fact in a recent article that was
written about weekly options
it said that weekly options they now
make up about twenty percent of the
stock market's daily
option volume but i think you'll agree
with me that just because something is
popular
it doesn't actually make it a good idea
for us automatically
now could quite possibly be a good idea
but popularity alone
does not help me make a decision i want
to understand why something is good or
why it's bad
so let's dive in to figure that out like
always i want to give you the absolute
best information i can
so i didn't just lean on my own personal
preference when it came to answering
this question
i will tell you though i encourage you
to watch until the very end of this
video
where i give you the reasons why i
prefer one over the other
i believe those reasons are a lot more
compelling than some of the facts i'm
about to present to you now
in preparing for this video i did a lot
of independent research
about the data behind weekly versus
monthly options
in doing that research the vast majority
of the articles i read
said that one of the advantages of
weeklies over monthlies is that they
allow the option
buyers to purchase for very little money
options have the potential to yield
massive returns
the reason is that you're not paying
much premium up front
for that short term option if you happen
to be right in your direction
then you could take a very low price
option and turn it into a huge profit
in fact many of the articles make
comments like if an option buyer wanted
to
bet on the direction that a stock would
move or if they wanted to
gamble on the stock's general direction
however as you know if you've been
watching my channel for a while
i absolutely do not promote buying
short-term options
and personally i don't like gambling
with my hard-earned money
i do however like to make investments in
trades when the odds are in our favor
in fact the majority of the time the
only options i'm willing to buy
are longer term or leap options so we're
going to consider this subject for the
perspective
of selling options briefly the
difference between a weekly and a
monthly option
is that weekly options expire every
friday whereas monthly options expire on
the third friday of each month but why
would someone want to trade
weekly options versus monthly options
when it comes to generating income
weeklies they tend to have the upper
hand if the option you sold is at the
money or very close to it
that time decay would dissipate very
fast of those last few days of that
options life
however if you're trying to sell out of
the money options on a weekly basis
you just won't get much premium for
those options so if you're trying to
sell out the money options
this advantage that weekly options have
over monthly options typically does not
really apply
especially as your short strike price
gets farther and farther out of the
money
so this advantage is that you're able to
potentially collect
more time decay by selling four weekly
options a month
as compared to one monthly option and
that's really the biggest argument
in favor of weeklies however there are
definitely other aspects of trading
options that you should consider for
example the bid
ask spread for weeklies tends to be
wider than the bid ask spread for
monthlies
the reasons that there's not much volume
for those weekly options
for example let's take a look at apple
stock here now i'm purposely picking one
of the most popular
highly traded stocks in the market right
now but even in apple's case
notice the difference in open interest
as well as the bid
ask spreads the nearest term option is
the one that expires in six days on may
the 14th
at the very top in the blue rectangle
notice the bid is a dollar 44
and the ask is a dollar 48. that spread
is not very wide at all
that's only four cents also notice under
the far right column and the blue
rectangle which is open interest
that is just over 11 000 open option
contracts
now if you go down to the next
expiration which is may 21st in the red
rectangle
that is actually the third friday of the
month or the monthly option notice that
the bid
ask spread is only 3 cents as compared
to 4
cents from the previous week however
open interest is over three
times as much as the weekly open
interest that expires in five days
finally let's look at the weekly expires
the week after the third friday of the
month which is may 28th in the purple
box
notice that the bid ask spread is the
widest of all three at five cents per
share
also notice at the far right of the
purple rectangle that the open interest
is only a tenth of what it is for the
monthly option let's look at another
example here of a stock
that doesn't have quite as much volume
as apple but is still a highly traded
stock
and a well-liked stock in disney again
you see the next three expiration dates
at the top in the blue rectangle we see
the may 14
expiration options and notice the spread
between the bid and the ask the bid is
2.73
and the ass is 2.92 cents the open
interest on the far right of the blue
box is just over 1600 contracts now
going down to the monthly option
which expires on may 21st notice that
the spread between the bid and the ads
is only 5
cents and the open interest is just over
2
000 contracts finally notice at the very
bottom in the purple box
the may 28th weekly option that the bid
and ask spread is 25 cents per share
and the open interest is about a tenth
what it is for the monthly option so you
can see here
that consistently for weekly options you
will not have as much open interest
and as a result you will see more
slippage or the spread between the bid
and the ask will be wider
so with weekly options you won't
experience quite as good of a price
execution
as you would for a monthly option
another potential negative of weekly
options as compared to monthlies
is the cost if you have to pay for
commissions on your option trades
now some of you may get free commission
i know this may not
for our accounts the commission to sell
options has come
way down from where it was years ago but
we still have to pay commission on every
option trade that we do
the commission is not very high usually
it's about a dollar per contract
but it can't add up over time since
you're trading weekly as compared to
monthlies
there's an average of 4.3 weeks per
month your commission will potentially
cost you
on average at least three times more
than if you traded monthly before we
dive into why i prefer trading monthlies
i just want to recap here because so far
nothing i've said
in my opinion is a really good reason to
not trade weeklies
in fact you might say the argument up
until this point is most likely in favor
of trading weeklies
you get faster time decay but you do
give up tighter bid
ask spreads and you have to deal with
transaction or commission costs which
will be higher
and there's not as much liquidity
however i'm going to be honest with you
if i could yield a substantially higher
return before that i had to deal with
wider bid-ask spreads
a little higher commission cost and less
open interest
depending on how good the return was i'd
probably go for it so to me the facts
here don't really cover the major
reasons
why i prefer to sell monthly options
over weeklies so here are my main
reasons for preferring
to trade monthlies versus weeklies first
of all as you can see here we like to
maintain a very diverse
option trading portfolio that way if one
position for some reason experiences a
sharp decline
it only affects a small percentage of
our portfolio in fact we target
if at all possible only allowing any one
position to make about five percent at
most of our portfolio
many times it's more like around three
to four percent of the entire portfolio
and we also like to keep our money
working for us we don't want it sitting
on the sidelines doing nothing
as a result right now in our main option
training account we have 33
short option positions a lot of them are
put options and a handful of them are
covered call positions
if we had to rotate the positions out
every single week
we go from making around 40 trades a
month to approximately 130 trades a
month
that'd be a tremendous amount of work it
would basically be almost a full-time
job
trying to keep up with when to close
those positions out what to replace them
with and then entering those new
positions
as well as the book keeping behind
keeping track of the profit and loss of
each position
i don't want to spend that much time
trading options so for me
one of the biggest factors is time i
definitely want to have a diversified
portfolio
because you just never know when some
wild story may come out and just destroy
one of your positions
but having at most five percent exposed
any one position
it really minimizes the damage that a
random event may cause
another major reason why i prefer
monthlies over weeklies is that many
times
we're able to close that monthly
position out early
notice an example of that here these are
the trades that we've made in bristol
meyers over the past month and a half
in a top red rectangle notice that on
march 19th
we sold the third friday of april 60 put
options for a dollar six cents per share
three weeks later we were able to buy
that option back for only nine cents per
share
so we made almost the entire option
premium we were able to close that
option out a week early
we waited a few days until april 13th
and when bristol mars came back down in
price
we sold the third friday of may 62.50
put option for a dollar 46 cents per
share
then 15 days later on april 28th we
bought the option back for 39 cents per
share
again we made a huge chunk of the profit
we're still able to close that option
out three and a half weeks early
finally in the bottom purple rectangle
the most recent trade we did
was two days after we closed out the may
62.5
put option bristol myers had another
drop so we sold to open a new
option with the same expiration day the
third friday of may
and pocketed a dollar 17 cents per share
even though
we sold that option at a strike price
which is 50
lower than the previous one we had
closed out a few days earlier let me
share with you an even better example of
this in our walgreens trade so far this
year
here's the trades we've done since
december 30th of last year
or about four and a half months ago
notice up top in the very first line in
the red box
that we sold the third friday of january
39
puts on december 30th if you look over
to the right under the receive from
sale you see that we pocketed 1.23 cents
per share
notice that just seven days later we're
able to close this trade out for a cost
of 23 cents per share
so we pocketed 81 percent of the monthly
options premium
in just one week and then look at the
next line below that in the blue
rectangle
that same day we wrote our short strike
price up by a dollar
and sold the third friday of february 40
strike put options
for a dollar and 27 cents per share fast
forward to only seven days
we close that position out for 24 cents
per share so able to pocket a dollar and
three cents per share which was again 81
of the monthly option premium in just
one week
we closed that position on january 13th
because walgreens no longer had any good
entry points in my opinion so we
immediately put that money back to work
in a brand new position however two
months later walgreens came back down to
a spot that we felt comfortable selling
put options at so as you can see in the
purple rectangle
on march 5th we sold the third friday of
april 45
put option received a dollar sixty four
cents per share fast forward only 11
days
or just under two weeks we close that
position out for 15 cents per share
so we're able to pocket a dollar and 49
cents per share or
90.9 of the monthly options premium in
just 11 days
we waited several weeks because
walgreens had experienced pretty large
price
increase then on march 29th as you can
see in the orange rectangle
we sold the third friday of may 50 put
option for two dollars per share
now we had to stay in this one a little
bit longer the expiration date
originally was may 21st
but as you can see in the far left
column under the purchase date
we bought it back early on may 3rd which
is almost three weeks
early for only 16 cents per share the
result
we pocketed a net of a dollar 84 cents
per share or
92 percent of the potential profit we're
actually able to close this short option
out three weeks early
the next day as you can see the very
bottom line we sold again that same
expiration day
the third friday of may 52 and a half
dollar put option for a dollar and 72
cents per share
and as of today four days later we're
still in this position
just because you sell monthly options it
does not mean that you have to stay in
them for the entire month
as you have seen here many times we were
able to exit these monthly positions
early
and put that money immediately back to
work in a brand new monthly option
position
by the way if that was really useful
would i just share with you that i'd
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thank you so much for doing that
so just remember that just because
you're selling monthly options
it does not mean that you can't close
those options out on a weekly basis
by selling monthly options we get a
larger option premium
up front than if we had sold weekly
options so we're having to do
less trades every month we get paid more
up front
and we don't have to deal with coming up
with as far as our account size
and diversity 30 plus high probability
option trades every single week and i
want to say since we're able to close so
many of them out
early we really are not missing out on
much if any additional income
which is really in my opinion the only
real advantage of doing weeklies
here is a third very important reason
why i prefer trading monthlies as
compared to trading weeklies
one of our goals in options trading is
to consistently make
high probability trades the income we
make from option trading is used to
either live on
to reinvest in growing our options
trading account size
or in buying what we consider
undervalued or solid fair price
companies
we are not in this to gamble as such we
want to make as
high probability trades as possible no
every single one of our trades doesn't
turn out the way we plan for it to
sometimes we do get them wrong but the
vast majority of the time we're
consistently profitable with our option
trades
the reason for that is because before we
do a trade
first we make sure that the company
we're trading in is fundamentally sound
we also wait until there are good
technical reasons to enter that option
position
i see many traders out there that say
that their only requirement
is that the stock is throwing off big
option premiums which
means that there's big volatility in the
stock if you're only risking several
thousand dollars that may not be that
scary
but if you plan to do this for a living
in the future or to do it in a big way
to me that is very scary i would not
want a huge one of my hard-earned
capital
at risk with the sole requirement being
that i'm trading in a highly volatile
stock
personally that sounds like a recipe for
eventual disaster
by trading in monthlies we can devote
enough time to finding option trades
that have a higher probability of
winning as compared to on a weekly basis
having to figure out how to roll 30 plus
option positions
and as a result be forced into doing
questionable option trades our number
one goal
in trading options is to protect our
capital our number two goal
is to get as high of a return as
possible while protecting that capital
by trading monthlies we're able to
consistently put nice wads of cash into
our pocket
while we're trading what i consider
solid stable and mature companies
if you'd like to receive alerts as soon
as we make trades similar to the trades
i talked to in this
video consider the benefits of becoming
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if you'd like to see more information on
how to find option trading opportunities
check out the video at the link above in
description below entitled
how do you identify option trading
opportunities until next time
happy investing and we'll see you again
soon