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The Issues Of Weekly Options, Risk, And Comments On My Daily Options Strategy

|Includes: Apple Inc. (AAPL), CF, CRM, GOOG

Over the past few months, there have been some comments made in my articles about using weekly options, instead of monthly options (as I strongly recommend using), and I feel it is a good time to address this issue in full.

First, I would like to start out with my take on this: One of my firm beliefs with trading stock options is that you should always give yourself enough time with a trade just in case an unforeseeable event occurs. When I developed this strategy, it was right after the September 11, 2001 attacks on the World Trade Center. I remember thinking how bad it must feel for traders who had short-term trades going with bullish positions. The lack of time would make it difficult for them to recover their losses.

Along with this, I also felt the need to wait to make any trades until after 10:30 a.m. EST. Not trading in the first hour takes away a lot of the unknowns in the market as far as direction. It also takes away a lot of the so-called "speed trades" or trades that are made solely by computers. These tend to happen right after the market opens or soon after 10:00 a.m EST. There was a great CNBC special a few months back that I highly recommend if you have not seen it already. It basically goes into what I am mentioning now. Just as I do not like trading within the first hour of the markets opening, I follow these same rules for the last hour of trading.

I want to get back to the issue of the weekly options with my strategy. Personally, I like weekly options for trades like the neutral calendar spread and the reverse iron condor, even the long put butterfly spread. However, I refuse to use them for my daily strategy and here are a few examples why:

If anyone claims that they can predict an unforeseen market event, catastrophe, or any other thing that can rattle the markets, they should not be in the trading business. It can happen at any time. The lack of time-value, if using weekly options with this strategy, will come back one day to really make you reconsider if using weekly options is the smart move. Often, the monthly options (next month forward, meaning instead of using an October Week 2, you would use a November expiration) are more expensive than the monthly ones, but not enough so that it should alter your choice in trading the monthly or weeklies.

This goes to an issue that I consider being a bit greedy, when choosing weekly options instead of having a full month. Often, for just a little more money, you can have a full month of time-value, take away the worry of any unknown factors coming into play, and still have the delta high with the same strike prices. This is important. While it is tempting to go the cheaper route and pick up more contracts (basically, that would be the only point in choosing a weekly option), I highly recommend not doing so. Think about how many times over the last 4-5 years Ben Bernanke has rattled the markets, just by saying a few words. It is not a good feeling to be on the wrong end of that trade when so little time is left with your options. That is the definition of risky.

I have received hundreds of e-mails over the past year regarding weekly options and by some of the people who use them. While they generally do well with them for a period of time, I almost always hear about the horror stories that ensued at a later date, and for exactly the same reasons I mentioned above. I am not suggesting that weekly options will not work at all. What I am saying that sooner or later you will get burned on them. I am writing this for everyone who is debating whether or not to use the weekly options instead of the standard monthly options that I make very clear is the correct way to trade with my strategy.

There is one trader who e-mailed me a while back. He bought some Apple (NASDAQ:AAPL) contracts using the strategy, and used weekly options. This is something i really want to get across here. Anyway, I went back and looked at his trade. It wasn't a good trade to begin with. The numbers were off on the Intraday Momentum Index and the Full Stochastic Oscillator, by a good amount. Having weekly options, instead of the monthly options, really put him in a bad spot. Since it was a trade that should not have been made from the start, he now had about a day and a half to right the ship, so to speak. I recommended to him that he close the position, as Apple was in a downward swing. He at least has in-the-money options that still has their intrinsic value. But guess what happened? He closed his position for a decent loss. The next week, and keep in mind the trade he made was not an ideal trade, Apple recovered heavily on Monday. The problem was, with the weekly options, he never got to see that gain.

Every trader is going to make mistakes at some point. One of the benefits of options is that you have a choice as to how much time you want to have with them. Please do not underestimate the importance of time-value using options.

I would also like to address a few users who have commented on my articles and InstaBlogs, which have gone beyond bizarre. First, I will immediately respond to attacks, misinformation, lies, and comments that I feel are hurting traders who are using this strategy. I will never endorse weekly options with my strategy, and I will make clear the pitfalls of using them. Nobody knows this strategy better than I do, and for anyone who suggests using weekly options is a better alternative than the monthly options is seriously steering you in the wrong direction. See, I actually care how people are doing using my strategy. This is why I try to the best of my ability to respond to the many e-mails I receive daily and the comments on my articles when I can.

One of the subjects that has come up from time to time is risk when using this strategy. It baffles me how one particular user has posted hundreds of comments on my articles promoting weekly options, yet says his method is less risky? Now, if I am buying the same strike price with more time-value, and theirs having less time-value, which makes more sense. Again, my opinion on this goes back to greed. He wants more contracts, I prefer more time simply as a safety-net in case of the unforeseen.

I am not a big believer in stop-losses. On a long position (months out) this can be very useful. However, on trades where you are expecting to enter and exit the same day, stop losses can be very problematic. For example, let's assume you have entered a trade using Google (NASDAQ:GOOG) with the daily strategy, and assuming you bought call options. Every so often, a stock will move down a bit from where you bought it. With a stock such as Google, Apple, (NYSE:CRM), CF Industries (NYSE:CF), etc., we are dealing with volatile stocks that move a lot in a matter of minutes, even by the tick. If you have a stop-loss when placing the trade, there is that possibility, maybe because of market conditions alone (nothing to do with the stock performance itself), that you will be taken out of the position without even giving it a fair chance to eventually do what you expected it would do the entire time. a 0.75 - $1.00 price move for these stocks is nothing for them. They often happen in minutes. Please keep this in mind. While stop losses can be beneficial on longer-term trades, please understand the possibility that you will be taken out of your position too soon.

There are times when you will have a choice to make in deciding whether or not you want to hold onto a trade overnight. I generally do not like to do this, but one very good way of avoiding this is to not make any trades once 2:00 pm. EST approaches. Stocks tend to trade narrowly later in the day. The volatility is just not there. I prefer to have an opportunity in the 10:30 a.m EST range to 1:30 p.m. EST. This is usually where the best trades will appear.

In the event where a decision has to be made where a trade just hasn't gone as planned, this is ultimately up to the person. It is hard for me to say or gauge what someone's tolerance is for a loss, nor their own capital. When I meet with clients in San Diego, I go over this with them. From afar, I cannot tell someone to cut a trade loose or to hold it without knowing their own situation. I will say this, however: whenever I have had to hold trades overnight over the years, I usually wind p doing even better than planned. But I like to be all cash everyday, another day of trading. Now, if you are down only a minimal amount before the market closes, I recommend closing the position. Tomorrow is a new day. What is difficult for many new option traders to stomach is how bad a trade can look because of the leverage options have. For example, if you own 10 contracts, a slight $0.50 move down on your call option position is a loss of $500.00 on paper. This scares many new trades off, as they cannot handle the large price swings. With options, just remember that everything is bloated. It is never as good as it looks or as bad as it seems. Having a month of time-value or more on your options will alleviate many of your worries.

If you have any questions or comments, please send me an e-mail or send a comment. I will try to respond as soon as possible. Thanks.

Disclosure: I am long AAPL.