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Avoid These 5 Weekly Options Trading Mistakes
By: Schaeffer's Investment Research | March 3, 2021

• Breaking down how to use weekly options and their pitfalls

• Breaking down weekly options to avoid mistakes with trading guru, Bernie Schaeffer

Stepping into the world of options trading calls for keeping yourself informed with daily trends and updates, which you can easily access by subscribing to Schaeffer's complimentary market updates. Weekly options trading is the new-ish game for those who desire to make fast profits in fast-moving market conditions. Trading weekly options can be riskier than traditional stock trading, but no more so than standard monthly options. Options can be significantly more profitable with less outlaid risk at the same time.

Weekly options differ in terms of specifications from standard monthly options, mainly in terms of expirations. Weekly options, as the name suggests, expire within a week but are normally cheaper than standard options on the same underlying equity. If you are looking to trade weekly options, know that these derivatives holds enough potential to help you maximize your gains and simultaneously provide you with loss management. To truly take advantage of the potential behind weekly options, all you must do is use the right trading tactics and avoid some common options trading mistakes. Saving yourself from these mistakes can prevent you from incurring major losses and keep your portfolio focused on rapid growth.

Here are the major pitfalls that weekly options traders may fall prey to:

TRADING WITHOUT KNOWLEDGE

The first and most common mistake that every trader makes is trading without sufficient options trading education. While stocks and options might be similar, there are significant differences in each asset's specifications. Starting out by subscribing to reliable. Subscribing to reliable newsletters like Schaeffer's weekly options newsletters can help you gain more knowledge and insight that is required to effectively trade and profit from weekly options.

Traders must be well informed on options basics and trading terminology such as margin, premium, put, and call. Understanding the language of options trading and execution is critical for traders ahead of placing an options trade.

There are also important parameters one needs in order to stay vigilant when trading weekly options. Understanding how weekly options work, how weekly options differ from monthly options, and learning about the impact of implied volatility and how it can maximize your profit potential with weekly options.

NEGLECTING VOLATILITY

Options are very volatile which means that traders can end up losing a lot of money, especially if an options expire out-of-the-money (OTM). When it comes to trading weekly options, the volatility increases even more significantly than monthly options. Weekly options are cheaper to purchase in exchange for an increase in potential risk.

Analyzing volatility is an ideal way to calculate your risk factor in a particular trader. Implied volatility is a way of predicting how volatile a stock may become in the long run. Implied volatility can act as a determinant to the price of the option premium. Traders must look at both expensive and cheap options premiums before applying a suitable strategy to tackle the implied volatility.

TRADING ILLIQUID OPTIONS

Liquidity refers to the active demand for the option with active buyers and sellers in the options market. Liquidity depicts how quickly a stock can be bought or sold with minimal price fluctuations.

Stock markets tend to be more liquid than weekly options markets as traders are in a run after one stock, whereas option traders are exposed to a plethora of options contracts to select from. Strike prices and correct expiration dates must also be considered when trading options. Therefore, choosing options where the underlying asset is liquid is essential to a solid weekly options trade.

LIMITING TO ONE STRATEGY

Trading weekly options comes with high volatility, but that very volatility creates the potential for you to see huge returns on your position in any market environment. Many option trading strategies exist to choose from that allow you to work around the volatility so that the volatility is working for you, and thereby maximize your profits.

As per the stock market situation and the movement of the stock price (up, down, sideways, etc.), weekly options traders must not limit themselves to using one strategy when approaching the market. Different strategies can help with different scenarios and make the most out of your portfolio rather than just sticking to a single strategy. Be sure to practice each strategy prior to implementation, and then confidently use a suitable strategy at the appropriate time based on market conditions.

KNOW YOUR PRICE TAG

New options traders are easily lured into buying out-of-the-money weekly call options. While these options may be very cheap on the surface, traders must know that that pricing is primarily due to the complexity and rarity of that trade being a profitable choice on a consistent basis.

OTM weekly call option buyers often follow a simple plan of buying the options at the lowest possible price and then proceeding to sell them at a higher price, resulting in a major gain. Sticking to this strategy can be risky and will prevent you from expanding your trading portfolio due to the absorption of unnecessary risk.

Keep these mistakes the every time you turn to trading weekly options. These tips will make things a lot easier for you, protect your downside risk, and help you to make a more solid profit in your options trading portfolio.

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