I’ve been asked by a couple of members, by email and through our comments, about whether they should use weekly options rather than monthlies for our hedged put IBM trade. The short answer is that this is a valid strategy but I chose monthly cycles as they are easier to manage and I plan to do several of them (and don’t want everybody having to roll 8 positions, say, every week). But weeklies are potentially more profitable – up to double the amount of premium per month.
The issue with them is when the short put goes into the money. The time decay on ITM weekly options can get quite small making rolling them forward not very lucrative. This is best illustrated with an example:
Let’s say we sold the $205 weekly put on our IBM trade for (to make the numbers round) $1.50. If IBM continues to rise then fantastic: we can collect $6 during the next 4 weeks rather than the $3.43 we received for our monthly put over a similar timescale.
The issue comes if this doesn’t happen. Let’s say IBM pulls back to $200. At the short $205 put’s expiration we now short $5. We could then, as planned, roll forward to the next week’s $205 put; but this would only be worth around $5.30. So for that week’s cycle we would only collect $0.30. That $3.43 for the month now looks very attractive if we can only collect 30c a week (or buy back the short put for $5: very expensive).
These are the two extremes, but I hope you can see that the weekly options may not provide the outcome we want. It can get very depressing being stuck with a short deep ITM put earning minimal weekly income.
I have in the past deployed a hybrid solution to this: I sell weekly puts until one of them becomes $x (which I determine beforehand) in the money. Then I roll to a monthly put. And then back to weeklies if this expires OTM (or monthly if not).
This is another of those tweaks that we may deploy on a later trade. As ever there is a balance between putting these twists out there and not confusing those just starting out and so we’ll leave this one for the time being.
Hope this helps.