Stock Options and Weekly Options

3. Stock Options. Straightforward stock options give traders a way to increase their profits in a trade by simply buying or shorting shares at a set price on or before a specific date on the open market.

There are certain advantages for the day trader, since parameters are applied to stock options (providing a well-regulated trading situation). As stock options are traded in the same manner as stock—on an exchange—this provides liquidity in the market as well as allowing swift execution of orders. These options also offer sophisticated investors an effective way to hedge risk.

It is important to realize that there is a potential to lose 100 percent of your investment. Brokerages typically will require the trader to be sophisticated enough to understand how the contracts work before granting the trader privileges to actually trade them. Within these requirements, there are varying degrees of option privileges as more sophisticated traders are also allowed to sell option contracts, which can expose the trader to enormous amounts of risk. However, day traders do not usually sell options.

4. Weekly Options. Commonly called weeklies, these are options listed with approximately one week to expiration (traditional options usually have months or years before expiration). Weeklies are available to the day trader on many of the most well-known stocks, on ETFs and exchange traded notes (ETNs), and on broad-market indices in the United States. Weeklies listed for equities and ETFs or ETNs are American exercised and physically settled.

Many day traders saw the long duration of traditional options as a major drawback. For these day traders, weekly options are a game changer. They provide the day trader a chance to capitalize on the leverage of options (equating to less capital tied up in individual trades) while continuing to engage in short-term strategies.

Weekly contracts are created each Thursday and expire the following Friday for equities and ETFs/ETNs. However, weekly index options close out trading either Thursday or Friday, depending on the index. As the name implies, they have a lifetime of one week or seven trading days.

One of the key benefits to day traders, seeking to take advantage of the increased volatility associated with expiration and the associated time decay displayed by options, is the fact that weekly options offer 52 expiration periods each year, significantly increasing the trader’s ability to take advantage of expiration opportunities.

However, even though weeklies provide a number of positive benefits to the day trader, they can also work against the trader, as time is of the essence. Although an option buyer will pay a lower price for a weekly option compared to a purchaser of a standard option, once they enter the trade there is a very limited window of opportunity, particularly so if the trade moves against the intended direction. For a day trader, it is difficult to repair the trade by adjusting strikes. There is also little time for price recovery through the underlying asset.