If as a trader you find yourself wanting to invest in stocks and commodities without actually buying stocks, trading weekly options may just be your cup of tea.
Why? Well, trading weekly options can be a good way to leverage your funds and to take advantage of shifts in the price of a company. Keep in mind though, you need to be well informed about what’s involved in trading weekly options in order to make intelligent investments.
Weekly Options Trading: A Quick Review
Trading options means you buy the rights to make a purchase of a stock or commodity at a given price. For example, if something is selling for $10 currently, you could buy the option to buy it at $11 or buy the option to sell it at $9. If the price drops, you’d make money if you bought the option to sell it at $9, since you could sell it for more than it was currently worth. If you buy the option to buy it at $11, you could sell it for a profit if the price went above $11.
Remember though, when you purchase an option, there’s an expiration date, which means your right-to-buy is only good until that date. If you buy weekly options, the expiration date is set a week from the time you purchase. The same idea applies to quarterlies.
How Do You Make Money When You Trade Weekly Options?
You make money when you trade weekly options if the price of the stock shifts over the course of the week, obviously in the direction you want. For example, if you bought an option to buy a $10 stock at $11 and the stock went up to $10.50 or $11, then your option would be worth more than you paid for. Pretty simple math more or less.
You don’t have to actually buy the stock to profit – you just sell the option at a higher price than you pay to buy it at.
Should I Trade Weekly Options?
Trading weekly options is an effective investment strategy if there’s enough of a shift in price of a stock over the course of a given week for you to actually make a profit. You need to ensure that you understand market trends. Also you should have an effective strategy for making your investments profitable before you choose this type of investment. A trading plan is a great place to start.
To learn more about what a trading plan is, how to make one for yourself, and to decide if you should trade weekly options, sign up for a trial to our Options membership for tips and advice about the options market.