Weekly vs. Monthly Options: Which is 💰 More Profitable?

Summary

In this video, Randy Perez explores the common question of whether it's better to trade weekly or monthly options. Drawing on over 22 years of trading experience, he compares the advantages and disadvantages of both timeframes. Weekly options offer faster time decay and more frequent trading opportunities but come with higher commission costs, wider bid-ask spreads, and lower liquidity. Monthly options, on the other hand, allow for better price execution, reduced transaction costs, and the potential for early exits. Randy shares his preference for monthly options due to their balance of higher premium, reduced workload, and better long-term returns while minimizing risk.

Takeaways

• 😀 Weekly options expire every Friday, while monthly options expire on the third Friday of each month.
• 😀 Weekly options benefit from rapid time decay, offering the potential for faster premium erosion for sellers.
• 😀 However, weekly options typically have wider bid-ask spreads and lower open interest, leading to less favorable price execution.
• 😀 Monthly options provide more time for trades to develop and tend to have tighter bid-ask spreads and better liquidity.
• 😀 Trading weekly options requires more frequent trades, which can increase commission costs and time spent managing positions.
• 😀 Perez prefers monthly options due to their ability to maintain a more diversified portfolio and reduce transaction costs.
• 😀 Trading weekly options could result in higher commission costs, as you may need to make multiple trades in a month.
• 😀 Monthly options allow for greater flexibility in exiting positions early, potentially capturing profits before expiration.
• 😀 By trading monthly options, traders can focus on high-probability strategies and reduce the risk of making frequent, less calculated trades.
• 😀 Perez emphasizes managing risk by limiting exposure to a small percentage of the overall portfolio (3-5% per position).
• 😀 Despite the advantages of weekly options, Perez believes that monthly options offer a more stable and profitable trading approach with less workload.

Q & A

What is the main difference between weekly and monthly options?

Weekly options expire every Friday, while monthly options expire on the third Friday of each month. This difference impacts their time decay and the frequency of trading required.

Why are weekly options becoming increasingly popular?

Weekly options have grown in popularity because they allow traders to buy options for a lower premium, potentially leading to higher returns if the trader correctly predicts the stock's movement.

What is one of the main advantages of weekly options for option sellers?

The primary advantage of selling weekly options is faster time decay, especially for at-the-money options, which can result in quicker profits as the option loses value rapidly.

What are the disadvantages of trading weekly options?

Weekly options tend to have wider bid-ask spreads, lower liquidity (with less open interest), and higher transaction costs due to more frequent trades, which can negatively affect price execution and increase commissions.

Why does Randy Perez prefer monthly options over weekly options?

Randy prefers monthly options because they offer more stability, a lower frequency of trades, better liquidity, and allow for greater portfolio diversification. He also values the ability to close positions early for profit.

How does liquidity affect the trading of weekly options?

Liquidity in weekly options is typically lower compared to monthly options, which results in wider bid-ask spreads. This can lead to greater slippage, making it harder to get favorable execution on trades.

What is the impact of commission costs when trading weekly options?

Since weekly options involve more frequent trading, commission costs can add up quickly. Over time, these higher transaction costs can reduce the overall profitability of the strategy compared to monthly options.

Can monthly options be closed early for a profit?

Yes, monthly options can be closed early for a profit. Randy gives examples in his trades where he closed positions weeks or days before expiration, locking in most of the premium and reinvesting the proceeds in new trades.

How does Randy manage his portfolio when trading options?

Randy maintains a diversified options portfolio by limiting exposure to any one position to 3-5% of his total portfolio. This strategy helps manage risk and minimizes the impact of unexpected events affecting any single position.

What role does volatility play in the decision to trade weekly options?

While high volatility can offer large premiums, Randy emphasizes that trading in volatile stocks is risky, and it should not be the only factor in choosing a trade. He prefers stable, fundamentally sound stocks with a high probability of success in the long term.