Weekly Option Contracts: the Good and the Bad

weekly option contracts

Selling option contracts can be an excellent way to add instant income to your investment account. But should you sell the monthly or the weekly option contracts?

In a recent post on selling call contracts, I mentioned that traditional option contracts expire on the third Friday of each month. Reader Mel commented on the post with the following question:

Why do you usually trade monthly options? Why don’t you use weekly options for puts and calls? Please explain.

Great question Mel! (And by the way, I love getting your questions. It helps me know what’s on your mind and how I can help. So keep ’em coming!)

Let’s start with the good side of weekly options…

The Benefits Of Weekly Option Contracts

When we sell option contracts for income, our goal is typically to sell these contracts at a high price. For put contracts, I typically want my contracts to expire leaving me with the income I received. For selling calls, the best profits are made when the call contracts are exercised and my shares of stock are sold.

Sign Up For My Free Newsletter

And get a FREE special report with my 10 favorite investment books!
  • This field is for validation purposes and should be left unchanged.

Either way, I want the contracts to lose premium over time. The faster, the better.

One of the reasons some investors prefer selling weekly contracts is that these contracts generally expire faster. (That’s assuming you’re choosing a contract with one or two weeks until expiration. This, versus selling a monthly contract with more time.)

Weekly option contracts lose value more quicklyNow, this gets a little bit technical, but there’s an interesting detail in the way option contracts lose value over time. Instead of trading steadily lower in a straight line, option contracts lose value slowly at first, and then more quickly just before expiration.

Since we’re selling option contracts, the faster the value of these contracts drops, the better.

So it would stand to reason that selling weekly option contracts may help you rack up income more quickly. This is assuming you sell option contracts week after week after week… And they all work out perfectly.

Drawbacks To Selling Weekly Option Contracts

While income can be accumulated more quickly (on an annualized basis) by selling weekly option contracts, there are some important disadvantages.

First, when you sell weekly option contracts, the absolute amount of income that you’re collecting is smaller. It may take a shorter amount of time for that option contract to expire, but you’re also getting paid less.

This is important when you think about the risk of a stock trading lower (assuming you sold a put contract). If you sell a longer-term option contract and the stock drops by a dollar, you may have received enough premium to offset that $1.00 drop. On the other hand, if you sold a short-term weekly option for a smaller amount, your income will be less likely to fully offset the decline in the stock.

Of course this is a matter of offsetting potential risk with potential reward. It’s not a black or white issue, but I tend to lean towards giving my positions a little more time and a little more margin of error.

A second issue to be aware of is that sometimes weekly options have a wider spread between the bid price and the ask price. This is an indication that the contracts are less liquid. Ultimately, this could result in less income because you’re not getting a fair price when selling your contracts.

Historically, monthly option contracts have had better liquidity than weekly option contracts. But that’s not always the case. However, if you decide to sell weekly option contracts, please make sure that you’re getting a fair price.

Finally, selling weekly option contracts just requires more work than selling monthly contracts. Now I’m not a stranger to hard work (and don’t mind putting in extra time if it means extra income). But I’m not sure that the extra work is really worth the extra payout.

If I choose to sell weekly option contracts, I’ll have to re-evaluate my position multiple times each month. This will take time that could have been spent researching new opportunities.

It’s All About Balance

As with many things in life, deciding whether to use weekly option contracts or monthly contacts is all about balance.

In this case, we’re balancing the possible higher rate of return (from selling weekly contracts) with several risks.

First, there is the risk of short-term moves offsetting our income.

Second, there is the risk of less liquidity (and poor pricing).

And third, there is the risk of opportunity costs (missing a new opportunity because I’m spending more time with my weekly contracts).

For my personal investments, I’ve chosen to mostly stick with monthly option contracts. But that’s not a hard / fast rule, and I’ll always be open to weekly contracts under the right circumstances.

Mel – thanks for a great question!

3 Comments

  • Mel I. Mendelson says:

    Hi Zach:

    Thanks for your last reply to my question. I have been following your recommendations over the last several months. When I make your recommended naked puts, the cash in my brokerage account is tied up to cover the trades. This leaves less free cash to make new trades. In order to continue making your weekly trade recommendations, my account needs to be about $40K. Is this about the right size? Should I get approval for trading on margin? Second question, why don’t you do option spreads, which would tie up less cash and would allow us to trade higher priced stocks like Apple or Google?

    Thanks so much,

    Mel Mendelson

    • zachscheidt says:

      Hi again Mel – thanks for the questions…

      I can’t answer them directly here because the regulatory guys may consider it “giving individual investment advice.” But you’ve given me two good ideas for additional posts:

      1) When does it make sense to use margin?

      2) What about option spreads?

      I can’t tell you what to do with your own capital. Only you can call the shots for your own account. But I’ll have some thoughts up shortly about the two topics above.

      Sound good?

      Thanks again for the great feedback!

  • Jamie M. says:

    More commissions and fees when selling weeklies as well. Which will also be a larger percentage cost of the premium you receive, IMHO.

Leave a Reply