Home » Here’s What Makes Weekly Options So Powerful

Here’s What Makes Weekly Options So Powerful

Even with the rebound we’ve seen in the major indexes over the past few weeks, the S&P 500 is still down nearly 18% since the start of the year.

And as the markets have continued to drop, we’ve seen cash levels steadily rise among individual investors like us.

According to the American Association of Individual Investors (AAII), the average cash allocation as of June 30 was 21.2%. 

That’s up strongly from the 15.1% allocation at the end of December 2021.

AAII Cash Allocation – Source: AAII & Ycharts.com

This makes sense, and it’s perfectly reasonable that investors have reduced their stock exposure as markets have dropped.

But markets are now rising again… So, you need a way to dip a toe back in and participate in the upside without risking a big chunk of capital if the market suddenly starts to drop again…

Don’t Get Left Behind

In one of last month’s articles, I talked all about stock options and gave a few examples to show just how powerful they can be.

But today, I want to explain why they can be so useful in an environment like this.

Now, as I alluded to above, it’s not that easy trying to get back into the stock market once you get out of it.

For example, there is still a lot of fear in the market air right now. Investors are still worried about inflation, interest rates, geopolitical conflicts and much more…

When you go to press the “buy” button in your brokerage account, these factors are going to cross your mind.

You are likely going to second-guess your decision, which is totally natural. Here are some thoughts that might run through your head…

“I missed the bottom… The market is too high to buy now.”

“Maybe I’ll wait for another pullback.”

“What if the market goes against me after I put this money to work?

You’re going to find a bunch of reasons not to get back into the market. And chances are the market is going to keep going up without you.

This is classic investor psychology at work… When prices are low, it’s very hard to pull the trigger and buy. 

So, you need another way…

Another Allocation Option

Options provide a way around this psychological issue because they offer a way to participate in the market’s potential upside without requiring a lot of capital.

But more importantly, they are also flexible when it comes to trading with a shorter time horizon. 

Regular readers know that in volatile markets, I always recommend keeping position sizes small and taking profits quickly when they’re available.

This is where options really shine, as there are options that expire virtually every single week.

Let’s use the SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500 index, as an example.

Say you’re not sure if the market rally has much real strength behind it, but you expect a quick breakout move above a short-term resistance level…

Daily Chart of  SPDR S&P 500 ETF Trust (SPY) – Source: TradingView

Instead of buying 100 shares of SPY and risking nearly $40,000 ($394.77 x 100 = $39,477) to make a few hundred dollars, you could buy a weekly option.

Whereas monthly options expire on the third Friday of each month, weekly options expire each and every Friday of the month.

So, let’s say this past Monday, you bought the SPY July 22, 2022, $390 strike call option, which expires tomorrow, July 22.

At the open on Monday, these options traded for about $3.43 per share, or $343 per contract, which would be the total cost to open this trade.

If the SPY is below the $390 strike at expiration on Friday, the option will expire worthless. 

However, the upside is potentially unlimited, so you’re risking a little to make a lot.

Now, the market rallied to $394.77 as of the close on Wednesday, and those same options are now worth $5.93 per share, or $593 per contract.

That’s a gain of 72.9% in just a few days in the option versus a gain of just 1.7% in the underlying shares.

Weekly for the Win

This is the explosive power of weekly options.

Had a trader gone with a further-out monthly expiration, like the monthly SPY Aug. 19, 2022, $390 strike call option, the gains would be much smaller in percentage terms.

This monthly option opened Monday’s session at $985 per contract and has traded up to $1,328 for a gain of 34.8%.

That’s a great return as well, but it’s not even close to the 72.9% gain on the weekly option.

Sure, you get more time for the trade to play out with the August monthly option… But in an environment like this, you may not want to put your money at risk for a full month.

If you’re expecting a very short-term move, you don’t need to pay a premium price for all that extra time value you don’t need or want.

Of course, both options have the potential to lose 100% of their value at expiration, but if used correctly, the additional leverage of weekly options makes them ideal for a market like this.

Now, I’ve been working on and perfecting a new option strategy lately, so expect to hear much more from me about the power of weekly options in the coming days and weeks…

I can’t wait for you to see what I’ve been working on!

Fly Under the Radar

Institutional investors like pension funds, mutual funds, hedge funds and other large players make massive institutional buys that fly under the radar of most individual investors.

But if you know how to spot those buys in real time, you can potentially follow the big money to big gains.

This is what I focus on inside my premium Stealth Trades research service.

Look, if you haven’t been making money in these markets, it’s time to try something new…

Take a few moments to click here and watch my brand new Stealth Trades video bulletin…

Embrace the surge,

Ross Givens
Editor, Stock Surge Daily

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