There is a new gold rush for covered call writers called weekly options, or "Weeklys." (Yes this is spelled correctly due to the Chicago Board Options Exchange (CBOE) trademarked the name.)
Weeklys have been around since 2005 and have severely been noticed because the option offerings were limited to the S & P 500 (SPX) and the S & P100 (OEX). In June of 2010, Weeklys were offered on the SPY, QQQQ, DIA and IWM, and in July 2010 the offers were extended to equities and ETFs. Stocks like Apple, Amazon, Netflix, Microsoft, Intel, Cisco, Research in Motion, IBM, Goldman Sachs and Bank of America, and more are now available. Las Vegas Sands is the newest addition.
In addition, there are some solid ETFs like the QQQQs (NASDAQ), GLD and GDX (Gold), SLV (Silver), USO (Oil) and FAS (3x bull), to name a few. There are about 30 at the moment and growing. However, the list can change weekly because each option exchange is allowed 5 picks per week to add to the Weekly list. If for some reason an exchange is not getting the volume, they can choose another stock. Recently, BIDU disappeared from the list.
Weeklys come out every Thursday and expire the following Friday. There are no new Weeklys in the final week where the monthly options expire. You can just write the next week from the monthly list.
Why Weeklys Explode Covered Call Writing Profits
Write Four Times a Month
Selling call options four times a month versus once is a pure gift. With option volatility at the moment, the premiums are fat and an experienced covered call writer can earn A LOT more premium. Doubling the monthlies in many cases is not unreasonable. That's like your boss calling you into their office and telling you they are doubling your salary and will now pay you every Friday! Nice. Also, if you use a long-dated put for protection, this "insurance" can be paid for very fast due to more writes per month.
Forecast Over Eight Days Instead of Thirty
Setting your crystal ball to look out 8 days versus 30 is easier. As traders know, the trend is your friend and it's much easier to look at what is happening in the week ahead. One of the biggest complaints about covered call writing is what to do if the stock really runs up and you have to either forgo the increased gains over the call option strike you sold or buy back the call at a higher price. If this happens, it's a lot easier to adjust over one week and reset with a new trend the next week.
Time Decay is Your Best Buddy
All call writers love and bank on time decay. With Weeklys, time decay is greatly accelerated. There have been times that calls I sold on Thursday morning on introduction eroded over 30% by Monday's close. I love weekends now more than ever! You can write near-the-money calls or at-the-money-calls and collect the higher premiums due to the rapid time decay.
Skip Earnings Week – Finally
How many times have you crossed your legs and held your nose during earnings week? Well, now you can just sit it out. Weeklys offer the maximum in flexibility. You can also trade the news that week before or after the event. Again, you can be in or out of the market weekly. That is flexible.
Super Size Premiums by Selling Weekly Puts
How much fun is this? Your stock's trend is solid, you have a buy / write for the next week and the money is in your account. Weeklys offer an astonishing opportunity to super size returns by selling a naked put or a put spread (to limit risk and to use less margin) for more premium. Just follow normal put selling rules; sell below a strong support point, at least one strike out of the money and maybe more if the premiums are good.
Choosing the put strike depends on your threshold of risk. Most put writers sell the puts in hopes that they actually can get the stock "put" to them, meaning they get to buy the stock at the lower price. That's a profitable way to get discounts on stocks you want to own anyway. Either outcome can be fine. One way you get to keep the premium and the other is you buy one of your core holdings on sale.
If you do not want the stock, just buy back the put. Another value is you do not need to own the undering stock to sell puts, so you can sell more contracts to collect more premium. Just be sure you have the margin if the put is naked (each brokerage has different margin requirements, for each stock, so check before you sell) and the account size to buy the stock. If not, then turn it into a spread and close it out if the trade does not perform.
It's amazing how many experienced investors and fund managers do not know much about weekly options. The word is spreading. One minor irritating issue is many retail brokerage houses do not offer Weeklylys on their platforms. E-Trade and Charles Schwab do not as of this time. Schwab is scheduled for January 2011 and E-Trade has no date. Along the revised direct access platforms, there is Think or Swim (TOS). TD Ameritrade bought TOS and clients get the platform.
As a non-client, you can still download and use the platform in play mode to paper trade and get some experience. Their support is quite good too. There is a lot to know about the various covered call writing strategies for up, down or sideways markets. The more you learn, the more you earn.