Understanding Weekly Options and Strategies
Learn about the different forms of weekly options, their trading behavior, and strategies for effectively using them in the stock market. Discover the nuances between weekly options that expire weekly and those listed on a rolling basis, along with insights on decay patterns and potential plays for earnings and dividends.
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Presentation Transcript
Trading Butterfly The Butterfly The Option Pit Method Flies and Broken Wings Option Pit
What You Will Learn How Weekly Options decay Different Uses of Weekly Butterflies Broken Wing Weekly Flies Riding the weekly wheel
A Tale of Two Weeklys There are actually two forms of weekly options Weekly options that list every week, expiring THAT week And Weekly options that list 4 weeklys on a rolling basis There are some important differences in how they trade
Weekly 1 The Thursday before the prior weeks Expiration. A May 1st expiring option would be listed on Thursday April 23rd The weekly does NOT list when there is a regular option contract expiring This used to be how all weeklys list, now almost none list this way
Weeklys 1 The weeklys like below have a herky-jerky decay that ebbs and floods through the week However, typically now these only exist in new weeklys and a few small indexes However it important to understand how these options decay
Weekly 1 A New listing initially has a huge ammount of decay on Thursday morning when it lists It then slows down and then is typically oversold by the afternoon It is then torched on Friday morning, Typically oversold again to the point that one can get a free look at the weekend When options open up on Monday, they start acting like a normal option contract would the week of expiration
Weekly 2 Weekly options were so successful at onset, but the crazy decay and herky-jerky nature of the options caused the people upstairs to think (for once) They began listing 4 weekly options around the front month standard option These options behave almost normally in terms of decay (there is no secret sauce)
Weekly 2 The main advantage of weekly options in this respect is pin pointing events like earings or dividends for option plays And as Andrew covered CALENDARS
Decay Sadly, those that think there is some secret sauce, missed the 2 month period where there was a secret sauce on weeklys However, you are armed with understanding of DECAY Where decay speeds up and where decay slows down
The Cone of Viability As an option moves from feasible to not feasible that is when it loses the most money Its this understanding that will allow traders to understand the decay of an options decay Buy outside of the cone Sell inside of the cone What is the cone, lets experiment based on your thoughts
Decay is linear at the wings and explosive ATM What position would benefit from this type of trade
Butteflies Butteflies are the BEST way to harvest premium out of a weekly trade, without taking a directional opinion is the butterfly The crazy thing is how short of a period is necessary to take advantage of a butterfly in a weekly contract Pigs get slaughtered, smart little piggys that go to the market can buy roast beef
Butterfly Monday Wings: .61 Thorax: 1.84 Tuesday Wings: .45 Thorax: 1.50
Butterfly The margin on that weekly fly was 77.00 a contract, a 10 lot would be 770.00 dollars In one day the trade makes 18.00 a spread That s 180.00 over 770.00 in ONE DAY that s 23% In a year, that s 45,000 dollars on 770.00 of daily risk
Butterfly Its not that easy because not every trade works that well But Vol risk premium is over priced, there IS edge in this trade Weekly Butteflys are a lot like punching a person much bigger than you 1 hit and then run like hell The key to a fly is to pick your spots and get out
Two Days Later Thorax: 1.88 Wings: .48
Butterfly When picking a butterfly in a weekly trade, the key is to think about the next TWO days, that is it What is going to happen between now and then I don t care what you look at: Candles, Bollinger bands, news, volatility you need to have a 2 day out look If you are in a fly for more than 2 days, you are in the wrong fly
Scanning Look for imploding but still somewhat high or even above recent lows Look for imploding realized vol, a severe drop in movement over a 3 to 5 day period Prior movement should be NORMAL not crazy Skew should be as flat as possible prior to the fly Theta should hit profit targets in 2 days or less
Managing a fly The fun thing about weekly flies is that there IS no management Do not try to adjust a weekly fly with any rolling technique that ADDS to margin The basic management is as simple as slowly buying the thorax as it moves around to manage delta Lets walk through managing our AAPL fly s delta as it rallies
Directional Butterfly Recall the rate of decay on OTM weekly options Also Recall that insurance value takes FOREVER to go away What type of trade would be a good trade in that type of environment A Direction fly
Weekly If I buy the stuff that decay s slowly Then I sell the stuff that decay s as slow or slower Then buy some BS OTM worthless option Makes for the cheapest, slowest decaying look at the movement over a week Its especially great for those that like to trade those near term technicals
Weekly Directional fly is bought for .07 Worth .17 on Thursday Worth .25 on Friday NEVER worth less than the opening cost
The Set Up Buy an option in the direction you want the underlying to move Option should be worth less than .25 (on a normally priced stock, under 130 dollars and below a 30 vol) Sell an option worth at least .09 against it, go as far as you can from the purchase price Buy and option as an equal length or closer, options should be worth less than .04 Pay less than .10 on the total package
The Mgmt Directional fly can be a broken wing with the upside wing closer or of equal Look to make at least .07 or .08 out of it Close on Wednesday if at break even Let the losers die If you close the wash trades, make .07 on the winners and lose .10 on the losers you will make money
Broken Wing for $ The retail version of the ratio front spread is the broken wing butterfly A trader buys an option that is OTM right at the edge of the cone of
1-3-2 An iteration on this trade is a 1 by 3 by 2 Here is a bearish trade for next week in AMZN
MGMT Trade is similar to a broken wing butterfly The big difference between all of the other spreads and this one is that it should be a credit always It is a much bigger play on realized volatility in a weekly Make sure the trade does not OVER SHOOT
Broken Wing Keep The Credit Buy the 83, sell the 83.5, buy the 85 Credit or .02, break event at 84.02
Why So Great Cause if I am wrong I keep the credit If I am mostly right I make money If I am right I make a lot of money Problem: if I am wrong I take it
