Ep 124: Trading Weekly Option Tips: (Earning 9%)

February 23rd, 2017

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Hey, this is Sasha Evdakov.

Today we will get into trading weekly option tips for earning 9% per week.

Keep in mind these earnings are not entirely realistic because it probably won't happen every single week. But I'm going to share with you some insights into how you can do this. And looking for opportunities to create and earn 9% per week.

This is a guideline, but I'm going to show you the numbers and exactly how this works. Also, I'll show you the strategy in place. I'm going to keep it as simple as possible.

However, you should understand some basic option concepts. If you don't, you may want to take a look at my options mastery course of trading verticals.

Disclaimer

Before we get into this lesson keep in mind that no recommendations here are presented for buying or selling any options, equities, and stocks.

All the examples are strictly for educational and informational purposes. I think most of you are smart enough to know and understand that.

How All of This Plays Out?

Take a look here at the thinkorswim platform which is by TD Ameritrade. I like this for educational purposes. First I want to make sure you understand what weekly options are and how they work and operate.

You'll notice on a stock like Tesla there's a lot of weekly options. In general weekly options are placed on Thursdays. For example, they're released on Thursday.

This one as you can see was released here that Thursday and you have eight days to go.

Here are our weekly options that you can see. Now you also have these other weekly options which have weird or not standard expiration dates for options. Keep in mind you do still have these as weekly options as well.

You can see that on popular stocks. Even Apple I believe has weekly options. You can see some of these have eight days to go. Here's one with 15 days to go. They're still considered weekly. That is because they have irregular expiration dates.

Big picture concept: When you trade weekly options one of your most significant factors is time decay. That's because you're compressing the time. And then also your price. The main reason for that is because the price is the most significant risk when it comes to trading options for the weekly.

It's not always the most prominent risk if you're trading longer dated options because you have more time to make that up. But once you start compressing the time it becomes much more expensive. That's why you need to be very careful with the price when it comes to weekly options.

Look at the premium. You can look at weekly options on the SPX. There are some weekly options. They have a ton of weekly. They even have quarterly options.

However, I'm going to share with you the Tesla weekly options. That way you can see how we come to these numbers. I'm going to try to do it here reasonably quickly. Because as we get into losing more time as I go and talk through this lesson, it switches and changes the example.

I'm going to shoot for 9% on the weekly options and put on a simulated trade for you. You can see how this trade works and how you can make 9%.

It's important to note that Tesla recently had earnings. Because it recently had revenues, it's down about fifteen points here for the day.

You can see we had a significant sell-off. We also had a considerable sell-off right here from these resistance levels. You have to understand where the trend is and where things are at.

Stocks usually stretch whether they stretch to the upside and then you get a reverse. Then you get a drop, or they stretch to the downside. And you get a bounce. This is what I'm going to capitalize on in this example.

Keep in mind there's different trading strategies and variations. But to be congruent in the example that's what we're going to hone in for.

When these earnings break, you might usually have one or two more days of down movements. And then two or three days of up movements. When this happens, this is what I'm capitalizing on or looking to make a profit on.

I'm looking to make a profit on this couple of days of up movements. Then maybe it will continue in reverse lower. I'm trying to expire the time in between that range or timeframe before it hits my strike prices.

This example is strictly for illustrative purposes and examples. I'm not telling you to do this. It's essential you practice this in a paper account before doing it.

I look at a probability of in the money. I'm looking for eight days out. It is a Thursday, and you can do this on a Friday if you wish. You can do this on Wednesday for some of the other weekly options as well. I'm compressing my time. There's not a lot of time to expiration. If I'm anticipating a slight bounce maybe by the second day of options this example may work.

Here I'm looking at my probability of in the money. This is the chance that it goes in my favor. That means if I buy this put at 237, I have a 90% chance that it'll go out of the money if I sell that.

If I buy it, I have a 10% chance of it working out. That means if I sell it, I have a 90% chance of it working out in my favor.

I took a look at the 240 level which is 12.93%. What I'm going to do is sell a vertical. I'm going to sell 12% which I'll get about 87 cents. I'm going to buy the 235 for protection. What we'll do is sell the vertical, and here I'll analyze the trade.

Here's what that trade will look like. I have 240 and 235. This gives me a profit or potential profit if this stock stays above that 240 level. You can see I make $41 on $459 of capital.

That is right around 9% if you look at it. Keep in mind we're at 88% probability or a chance of success. If you look at 12%, that's right around 87% chance of possibility.

Do You Want to Trade Big?

If you want to bump this up and you're trading a little larger, you could do ten contracts. You're looking to make about $410 since the difference between those two contracts is 41 cents. They're making $410 on $4590 of capital.

Do the calculation: 410 divided by 4600, and we're at 8.9% on our money.

In either case, the reason this works out well is a couple of factors. I'm creating a trade that allows me to make 9% within eight days. Be aware of the fact that two of those days is our weekend.

My Theta is around $50-$60. But I do have price risk. I'm only about 10-16 points away from that range. I'm at 240, so this stock needs to stay above this 240 price level.

If it doesn't, I'm in the money and that becomes a problem. I lose out on my capital, and that's dangerous. You can see the range is not that big.

On the other hand, when you go with monthly options, you can get a lot longer, but you also have more time. In either case, here I'm at the 240 level. It only gives me about 17 points to be able to get this stock and to hang out a few days. And then hopefully it stays above this 240 level.

If it breaks below that, you get into serious trouble. Because now you could have a loss of $2000, $3000, $4000 - more risk.

Your concept behind this is that time is working in your favor incredibly fast. The theta decay is so quick. Only a few days are remaining, but the price is a problem.

This is how you set up a basic trade in this context. If you're looking to make more money here's how you add to this. We did the put side, but what if I also do the call side. And maybe I don't do it for as much capital.

The one I wrote down is 285, and we sell a vertical on this upper side. This is like creating an Iron Condor, and we go to the 290 level.

I'm only making 10 cents on this, but let's bump up a few contracts here. You can see I'm making 500 on my $4,500 investment. If you take that calculation and do 500 divided by 4500 you can see I'm making almost 11.2% on my money.

Keep in mind you need this stock to stay between that range. That's the risk. If you get the snap up - perfect. If it goes down, then you have a problem with the left side. It can go down past that 240. If it goes past that 285, you have a problem with the upper side. Those are some of the risks that you have.

One of the reasons why this works well is because:

  • we've had a significant down move so we've sold off in a big way so I would assume there would be a little pop
  • the other thing is that Tesla also has some good volatility

If you look at Tesla's volatility, you have about 37.1% volatility within these options. Do something similar on Apple when it wasn't earnings.

Look at the premium here and the premium just going a little further out with an apple. You have 17 cents, 12 cents, 24 cents, 25 cents and we're eight days away.

Even at around the 12% range where we want to get there are only about 20 cents of premium. If you go to a stock like a Tesla and you go 12 points, you get about 88 cents. You get a lot more premium.

Tesla has almost four times as much premium in it. That's the case because it's a higher price stock and the volatility.

Not So Great Scenario - Only 3%

If you go with Google, you can do the same concept. At 12% you get $1.15, but a higher price stock will move and whip around much more.

The thing is you could do the same thing with Google. We sell the vertical. If you're a little more risk-averse or you're nervous about the stock, then you could go even further. You don't have to go to 12%.

We'll go at 805 and 790 in this case. You can see I have $47 on profiting on $1453 of capital. It's time to do the calculation. On this one, you'll get around 3%. That is not so great.

If I go to 810 and 795, I'll be a little closer. You can see now there are $80 on $1420 of capital. In that case, you're making about 5%-6%. You can sell the upper side of Google, and we do something like 850 or so. We sell that vertical, and here, in this case, we'll go 845 and 850.

This is what we get from that:

  • $120
  • $1380 of capital

You make about 8% (almost 9%). This one works, but the problem with this is Google had earnings already in the past. The profits were not today. It's been already climbing up. When you look at Google here are the gains that happen.

Here's the earnings date and that's what we're looking for in Tesla. You probably see a significant pullback which is what we see in Tesla. And you get this upwards trend slightly as a counter-trend bounce. Maybe now we'll see a slight rollover after that. Who knows what happens. But for me as long as within eight days that stock is above that certain level that's what we're trying to capitalize on.

The same concept here is that in Google this already happened. You could put this trade on now, but remember you didn't get that snap down to the downside as you did with Tesla in the earnings.

With Tesla, we got that snap down, and now I'm looking for a counter-trend bounce. I'm okay even if it's $4 or $5 and it happens for two or three days and then I get it and then it moves back down a couple of dollars after. I'm okay with that because time is on my side. After a few days within a week, this expires. And I can set this and let it expire as long as it's between that range.

When you're creating this strategy and spread you can see on $4,500 of capital you can make $4700. So, 467 divided by 4533 and you get 10% on your money.

That's the way that you would set up a trade to make 9% to 10% per week. But all the things are here in alignment. They're in alignment in congruence meaning you have earnings that happen, get a massive drop down the stock was doing well. The market is holding up pretty well, and the volatility of this stock is a lot higher. Comparing it to Apple, the volatility is a lot lower. Comparing it to Google, it already had earnings.

The conditions are set up accordingly. Anytime you're trading weekly options spreads all of a sudden you're adding hot sauce to the fire. You're adding gasoline. You're adding more energy and more momentum. That means you need to be extra careful because you have less time premium.

When you have less time although it can work in your favor with the Theta the price risk is a problem since it can move against you very quickly. And you don't have that broad range to cover that spread.

Keep that in mind. This is just giving you some ideas and insights and things to think about as you put on and create these spreads or strategies. Or learn and evolve to create a strategy that works for you.

Final Word

I hope all of this you found it helpful. Maybe makes you think a little bit more about trading options or weekly options for that matter. I don't recommend you trade only weekly options. Instead, it's better to do 90% of your account to do regular options and maybe 5% or 10% of your account you could try some weekly option spreads.

Then you could slowly find your balance and find your level. They're used as a hedging vehicle. So if you want to hedge something for just a week, you could buy a weekly option hedge - for example for earnings. Learn the way things work and always have a plan in mind.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

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