Weeklies and the Options Market
Over the past several years one of the biggest changes for the option trading market has been the addition of weeklies. Having an option series that expires every week as well as being able to buy those two, three, and four weeks from expiration has given traders more agility in adjusting their time frames for different option strategies. These options can be particularly useful around earnings release times now enabling traders to actually just play the weekly for whenever earnings are released in a particular underlying. For the nondirectional trader, who puts on positions allowing for some movement in either direction, as long as it’s not too much they have also been a way to get quicker theta and have a position become profitable for you sooner. Obviously, you have much quicker time decay with an option that is expiring in a week or two then an option that you may have sold it’s not expiring for 40 or 50 days. Still, there needs to be a balance between shorter-term option plays and longer-term option plays. For the trader who wants to put all of his trading capital into trading weekly options there’s a real risk because of the increased Gamma and Delta in the final week of training. Of course, this is balanced against the allure of quicker time decay, which is why many call weekly options the “crack cocaine” of option trading. As an option trader and a mentor over the last several years I have determined that there should be a balance between longer and shorter time frames. Personally, I like to have no more than one third of my trading capital dedicated for options trading in weeklies, and I like to have most of my nondirectional plays be in further out time frames: 30 to 40 to 50 days out and more. In fact, even option plays that are two weeks out can be much better dealt with when they move against you than one that is one week out. So for the nondirectional trader, having some that expire quicker and some that you have more time for can be very healthy for your trading account. New traders in particular should start out with longer time frames as they’re more forgiving of movement and then get into the shorter time frames as they become more proficient at option trading strategies. Just remember, quicker isn’t always better but it can be very useful in certain circumstances.
Mark Fenton
Senior Mentor- Sheridan Mentoring
Iron Condor Trade
With the recent increase in volatility in the market, the iron condor is beginning to look to be a more attractive trade again. We recently have seen the VIX, or implied volatility of the SPX, go from being down around 12, up to 17 earlier today. The iron condor involves selling an out of the money call vertical and an out of the money put vertical, thereby bracketing the market in a wide area that you hope for the underlying to trade in. For instance, in the SPX, currently, you could sell the October 2005 calls and buy the October 2015 calls, and then you could also sell the 1890 puts in the October monthly and buy the 1880 puts. This would be for around a $3 credit. Then, as long as over the course of the next two weeks the SPX stays within the range of 2005 and 1890, you will be profitable. By selling the iron condor now you’re getting paid a little bit more than you would have even a couple of weeks ago for the same time to expiration, because the increase in volatility has caused an increase in the price of the shorts that you are selling. Always keep an eye on the downside, though, as the market is currently in a bit of a down trend. Be ready to buy protective long puts or even remove the put vertical if the market moves down substantially.
Mark Fenton
Senior Mentor