Weekly vs. Monthly Options: Which is Right for You?
When trading options, choosing between weekly options contracts and monthly options contracts can significantly impact your strategy and outcomes.
Weekly options offer frequent expiration dates and may be used by some traders looking to capitalize on short-term market movements or manage risk with greater precision. Monthly options provide longer time horizons, making them a more appropriate option for those with a more extended outlook or who prefer less frequent trading.
This article explores the key differences between both types of options.
Weekly vs. monthly options: The main differences
Weekly and monthly options each serve distinct trading needs. Weekly options expire every Friday and offer flexibility for short-term strategies, helping some traders to potentially exploit rapid market moves or navigate risk with greater confidence. They can be a good option for short-term trades and can be useful for potentially capturing quick gains or hedging against immediate risks. Monthly options, expiring on the third Friday of each month, provide a longer time frame, making them better suited for traders with a more extended outlook. They often come with higher liquidity and more stable pricing.
What are weekly options
Weekly options are similar to standard monthly options but have a much shorter expiration period. Due to this shorter duration, weekly options often come with lower premiums, as there’s less time value (also known as extrinsic value) for the option.
Because they expire quickly, the prices of weekly options can be more volatile and react faster to changes in the underlying stock's price. These rapid price swings can make weekly options both appealing and risky, especially in volatile markets.
How do weekly options work
Weekly options are short-term contracts that expire every Friday. They can be an appropriate choice for short-term, flexible trades. With lower premiums than standard monthly options, they can allow traders to employ more short-term strategies. Some examples include:
S&P 500 Index ETF: Trade weekly options in an ETF that tracks the S&P 500 index to potentially capitalize on short-term S&P 500 index moves.
AAPL: Anticipate Apple's price swings during earnings or product announcements.
MSFT: Attempt to leverage short-term signals or events in Microsoft stock.
TSLA: React to potential Tesla volatility caused by news or events.
Weekly options can be a good choice for traders seeking frequent opportunities and nimble position management. However, traders have to be aware of risks and drawbacks that can come with options trading and weekly options specifically. These may include greater volatility and additional time needed to monitor open short term positions.
Weekly options strategies
Targeting lower premium and higher gamma
When trading weekly options, you can generally pay a lower premium (the upfront cost) when compared to a monthly option, while getting higher gamma, which measures the rate of change in an option's Delta when the stock price changes by $1. This may be useful if you’re expecting a quick, significant price swing. Since weekly options are cheaper, you get more leverage with less cash, but the risk is higher as they can lose value quickly.
Targeting higher theta
Theta represents time decay, or how fast the option loses value as expiration nears. Weekly options have high theta, meaning they lose value rapidly, which can benefit traders selling options. If you believe a stock’s price will remain stable, selling weekly options may allow you to capture profits from time decay as the option’s value decreases daily.
Targeting expiration frequency
Weekly options expire every Friday, providing more frequent trading opportunities. This allows you to plan short-term strategies around earnings reports, news, or market events. With more expiration dates, you can trade with greater precision and potentially roll positions week-to-week based on the latest information, but be cautious of the faster time decay and greater market sensitivity.
Rolling involves closing an existing position and realizing any gains or losses, while also opening a new position. Rolling options doesn’t ensure a profit or guarantee against a loss. You may also end up compounding your losses.
Potential benefits and risks of weekly options
These short-term instruments can be volatile as a small movement in the underlying stock may result in a large loss. Because of this, weekly options might call for additional monitoring. Another possible downside to weekly options can include additional fees as a result of more frequent trades.
What are monthly options
When people refer to "monthly options," they typically mean the standard options contracts that expire on the third Friday of each month. These are the most common type of options and are often what people refer to when they discuss options. Monthly options contracts tend to have higher trading volume and open interest, which typically make them more liquid.
How do monthly options work
Monthly options are standard options contracts that expire on the third Friday of each month, offering a longer time frame compared to weekly options. They provide traders with a broader window to potentially capitalize on market movements or hedge positions.
Monthly options tend to have higher premiums due to their extended duration, reflecting the increased time value. Traders can use them for various strategies, such as buying calls or puts to speculate on price movements, writing covered calls for potential income, or spreads to manage risk. Their consistent expiration date and liquidity make them possibly appropriate for both long-term strategies and less frequent trading.
Examples of monthly options
Common examples include contracts for popular stocks like Apple (AAPL), Tesla (TSLA), and Microsoft (MSFT). Investors might use these options to execute longer-term strategies, like covered calls or protective puts, or to hedge against market volatility over a month.
For instance, a trader might buy a call option on AAPL that expires next month if they believe the stock will rise. Similarly, they could purchase a put option for TSLA if they expect a decline before the month’s end. Monthly options are versatile and widely used.
Potential benefits and risks of monthly options
Potential benefits
More time: Monthly options give you more time for your trade to work out.
Slower time decay: They lose value slower than weekly options.
Flexibility: Can be appropriate for longer-term strategies and trend following.
Potential risks
Higher premium: Monthly options usually cost more.
Certain complex or naked option strategies can carry additional risk, including the potential for losses that may exceed the original investment amount. This applies for both weeklys and monthly options.
Market changes: Longer time frames increase exposure to unexpected market shifts.
How do I trade weekly options on moomoo
To trade weekly options on moomoo, first, open the app and search for the stock you want. Tap on the stock, select “Options,” then pick a contract that expires within the week. Choose either “Buy” or “Sell,” decide how many contracts you want, and set your price. Review your order, then place it. Remember, weekly options are fast-moving, so have a plan before jumping in.
FAQs about weekly and monthly options
Is trading weekly options profitable?
Trading weekly options can be profitable, but it requires a solid strategy and keen market insight. Their short duration offers opportunities for potential quick gains, especially in volatile markets. However, the rapid time decay can also lead to significant losses if market movements don’t align with your expectations.
Are weekly or monthly options better?
Whether weekly or monthly options are better depends on your trading goals. Weekly options can offer flexibility for short-term trades and quick adjustments but come with higher time decay risks. Monthly options provide a longer timeframe, which can benefit longer-term strategies and reduce the impact of daily volatility. But choosing the best option depends on your market outlook, trading style, and risk tolerance.
When should I sell my monthly options?
The best time to sell your monthly options depends on your strategy and market conditions. If you're looking to capture premium, consider selling options when implied volatility is high, as this increases the option's price, all other factors being equal. It may also be a good idea to monitor the time decay (theta) since options lose value as expiration approaches. As a reminder, options writers take on a much higher level of risk. For example, an uncovered call has the potential for unlimited losses, since there is no cap on how high a stock price can rise. On the other hand, if you're the option holder, and if your option is deep in-the-money or the underlying asset has moved significantly in your favor, locking in profits may be wise. If the market moves against your position, selling early can help manage losses.
When should I trade weekly options?
The decision to trade weekly options is personal and will depend upon every trader's investment strategy and individual financial circumstances. Trading weekly options may be more appropriate for some traders who want to capitalize on short-term price movements, events, or earnings reports, typically with lower upfront costs. They're better suited for experienced traders looking for potential returns on short-term strategies, but carry higher risk due to limited time value and rapid decay. They can be used for strategic reasons like hedging, speculation, or attempting to generate income. If trading weekly options, you should always ensure you have a clear exit plan and risk management strategy in place.