This article will address the following issue: When should an option trader sell weekly option premium?
As early as Wednesday, we can find out what weekly options will be listed on Thursday morning. Just go to the CBOE web site http://www.cboe.com/ and click on the PRODUCTS tab, select Weeklies and then click on the blue lettering, Available Weeklies. Each column of the list specifies the first trading day as well as the expiry. The list constantly changes for weekly options on the equities, while weekly options on Cash Indices and ETFs are more stable.
When weekly options are listed on Thursday morning, the premium is not at the same level as the next day, Friday, at the close. The main reason for this discrepancy is very simple, time decay and volatility. On Thursday morning, the premiums are usually richer than at the close on Friday. Sometimes, due to low implied volatility, the premiums don’t start off so rich. Option sellers can be faced with the challenge of whether the best time to sell premium is as soon as the weekly options are listed Thursday morning, or to wait for Friday just before the close.
The question of when is the best time to sell is a matter of personal choice. There are traders who trade without looking at the charts, selling premium with the intention of covering it for less than what they sold it for. In fact, as soon as they get filled, an order to close (the spread) for half (of the credit received) or less is placed. These traders do not pay much attention to technical analysis and they do not look at the chart. They are profiting from premium selling of either OTM or ATM options.
There is another way of trading weekly options that is more technical. Although these traders still sell either ATM or OTM options, they are attempting to stack the odds in their favor by analyzing current price action. Putting the odds in one’s favor is much more attractive than blindly placing a trade. Moreover, any type of trade, directional or non-directional, can be done based on chart reading. For example, if price is at support (50) and bouncing, then a Bull Put spread could be done by selling the higher leg (49) just below support and buying the lower leg (48) for protection. However, if price is at resistance (60) and it is unable to break higher, then it is logical to place a Bear Call spread. The selection of the sold strike should be done in such a way that it is just above the level of resistance. The sold (62) leg would in this case be the lower leg, while protection would be the higher leg (63).
If the underlying is trading in a channel with well-defined levels of support and resistance, then a Bear Call and Bull Put could be done simultaneously. These two credit spreads would create an option strategy known as an Iron Condor. The word IRON meaning a spread trade made up of both calls and puts; that is all that the word IRON truly stands for – nothing fancy but just calls and puts. In the case of an Iron Condor, maintenance required should be more favorable than if only either a Bear Call or Bull Put was placed. This also comes with higher premium because the credit received from both sold spreads adds up while the maintenance goes down. For this sole reason, Iron Condors are very popular with option traders.
Finally, let us answer the main question: Is it better to open a trade on weekly options first thing Thursday morning or not?
It is true that we should get richer premium on Thursday morning than what we would get for the same spread on Friday just before the bell. However, keep in mind that with richer premium, we are also assuming more risk. If the position is open after the opening bell on Thursday, it could go against us the very same day or the next day. Is it worth the risk? The reason why we looked at the chart and analyzed the price action was so we could avoid unwanted surprises as much as possible. From Thursday morning on, a lot could still happen while on Friday just before the closing bell there is less time opportunity for situations that could go against us.
When the position is open a few minutes before the closing bell on Friday, there is not much likely to happen in those last few seconds. The market is closed over the weekend while time decay is working for the option seller. However, keep in mind that there is always a possibility of a gap either down or up which is a risk that cannot be avoided. Reward is always connected with risk.
In conclusion, this article has pointed out considerations to take before just blindly firing off a trade using weekly options on a Thursday morning. It may be wiser to wait until just before the close on a Friday and then to send in the trade. Be aware of the fact that you should attempt to get into your positions earlier than the very last minute, unless you are selling at the market. The goal is to be in the position before the closing bell. Click here for the article “Getting a Better Fill” to read more on this. Good trading.
– Josip Causic