Is there an advantage to writing weekly vs. monthly put options? Clearly, there are differences in premium and holding period. In the SOI newsletter, we don’t discriminate and trade both. But there are valid factors for choosing one over the other.
While many traders will look at the absolute dollar amount of premium and go for the largest dollar, calculating the return is what gives you the true picture. We can see this best with some examples.
AAPL is as good a place to start as any. Let’s say AAPL is trading for 144, and the weekly 135 strike option (expiring in 1.5 weeks) is trading for 1.48 x 1.52. AAPL has a 20% option margin requirement. There are about 7 days to hold. We’ll put a price target of 0.10 on the option. Here’s a simple return calculation:
Annualized formula: (1 + return over period) ^ (365/N)-1
135 x 100 = $13,500 x 0.20 = $2,700 (margin requirement)
$1.50 – 0.10 = $1.40 x 100 = $140
Convert days to ratio: 365/7 = 52.14
140 / 2700 = 0.5185
Annualized Return: (1 + 0.005185) ^ (52.14) – 1 = 30.95%
By annualizing the return, we can compare one investment to any other, giving us an apples-to-apples comparison. Let’s now look at a monthly option. The monthly is 29 days away. The same 135 strike is trading for 3.40 x 3.50. Calculating the return:
135 x 100 = $13,500 x 0.20 = $2,700 (margin requirement)
$3.45 – 0.10 = $3.35 x 100 = $335
Convert days to ratio: 365/29 = 12.59
335 / 2700 = 0.1241
Annualized Return: (1 + 0.001241) ^ (12.59) – 1 = 1.57%
Obviously, there is no comparison between the two. The weekly is the much better trade. Even though the monthly offers a higher absolute premium, the much longer holding period is what kills the monthly trade. The weekly lets you in and out of the market quickly, taking a profit and dropping exposure. The monthly locks you into a duration trade, taking on more market risk in the process.
Also, if you had to choose between holding exposure for 7 days vs. 29, which sounds more appealing? The best exposure is zero exposure. Now that you have a quantitative method for determining the better trade, there’s no reason to guess or go after the big premium dollars while taking on considerably more risk (i.e., duration).