Weekly vs. Monthly Options | Which Should You Trade?
Weekly vs. monthly options come with their individual pros and cons, so understanding the difference will make a significant difference in your trading strategy.
Key Takeaways
Weekly options have a much shorter lifespan than monthly options, with a lifespan of only one week as opposed to one month.
Weekly options can provide opportunities for short-term traders to take advantage of specific market events or conditions, while monthly options are typically used for longer-term investments or hedging strategies.
Weekly options may have lower premiums than monthly options, due to their shorter lifespan and lower time value.
Weekly options may be more volatile than monthly options, as they have less time to react to market events and news.
Monthly options may be more liquid than weekly options, as they are more widely traded and have more open interest.
How do Weekly Options Differ from Monthly Options?
Trading weekly and monthly options both have their pros and cons. Which ones you trade should depend on your risk tolerance and trading strategy.
Weekly options expire at the end of the trading week, typically on a Friday. On the other hand, monthly options expire at the month's end. The key difference between the two is the time horizon they offer. Weekly options provide traders with more short-term opportunities to profit, while monthly options offer a longer-term perspective.
Additionally, weekly options typically have higher implied volatility, which can make them more expensive, while monthly options tend to be more stable and less volatile. This can benefit traders looking to take advantage of short-term price movements or hedge positions.
Theta Decay Considerations
The theta decay of weekly options is much more aggressive when trading weekly options. Since they expire much sooner than monthly options, you have less time to be right in your trade.
Theta decay of monthly options is much less aggressive since they have much more time until expiration. So essentially, monthly options are more stable than weekly options since they aren’t affected by theta as much.
Gamma Considerations
Gamma is the rate of change of delta, meaning it measures how quickly a stock price moves. For example, when you are trading weekly options, gamma is much higher since if a stock moves quickly in one direction, the option price will be affected more.
Let’s say stock XYZ is trading at $100 per share, and you are bullish. So you want to buy a call option with a delta of 30.
The delta 30 call for a weekly option will likely be the $101 strike call, while the monthly delta 30 option will likely be the $105 strike.
Therefore, the strike price for the weekly option will be much closer to the stock price than the monthly option and have higher gamma.
Weekly options have higher theta but also higher gamma.
Monthly options have lower theta and also lower gamma.
Selling Weekly vs. Monthly Options
The fight between gamma and theta is crucial to understand when you sell options.
The primary risk of selling options is the overnight gap risk. If a stock gaps 20 points overnight, there is nothing you can do to manage your risk effectively as an option seller.
A gap on a weekly option will hurt much more than a monthly one since it can go ITM quicker.
Selling weekly options provides more theta decay, but gamma will hurt you much more. Therefore, to generate more stable returns as an options seller, you may want to sell monthly options to reduce your gamma risk.
Buying Weekly vs. Monthly Options
As an option buyer, you benefit from significant stock moves. Therefore, weekly options may be a good route for short-term trades if you want to maximize returns.
However, if you are wrong and the stock doesn’t move much, theta will eat away at your contract.
Buying LEAPs options (options that expire in 1+ year) is still a good strategy, though, because it gives you lots of time to be correct.
Generally, people buy LEAPs that are already ITM, negating the benefit of gamma anyway.
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