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Tales of a Technician: Covered Calls: Weekly vs. Monthly

March 16, 2016

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With the advent of weeklys options the choices facing option traders has multiplied ten-fold. But it shouldn’t be overwhelming. All you need to understand are the principles undergirding expiration and strike selection and your choice should be easy. Whether you’re selling covered calls, naked puts, or engaging in one of the myriad other strategies, you don’t need to re-invent the wheel every time you initiate a new trade.

I received a great question from Robbie in response to last weekend’s newsletter on Covered Call Perfection.

“Is there a set of rules or wisdom you can impart when it comes to choosing the right time to expiration for covered calls?”

Let’s start with the obvious. Covered call sellers focus on using short-term options to maximize time decay. 30 to 45 days is the most common. Perhaps you’re wondering if it’s better to use weeklys if they’re available on the stock you own. The answer is yes and no.

Remember, Wall Street is a world of trade-offs and nowhere is this more apparent than when trading covered calls. I’ve included a few comparisons in the accompanying graphic above. Let’s dig into each.

Tales of a Technician: Covered Calls: Weekly vs. Monthly

First, you have the choice of selling one monthly option or four weeklys over the same time frame. In the above graphic I used USO options and compared selling one April 10 call for 37 cents or four 10 weeklys calls between now and April which would generate about 58 cents.

When it comes to income generation Weeklys have the upper hand.  But we can’t stop there. How about cost?

If you sell monthly covered calls you’re essentially paying one commission a month. If you sell four weeklys you’re paying four commissions. The transaction costs for the weeklys route is four times greater. If you’re paying a minimal amount of commission perhaps this isn’t a big deal. If you’ve yet to get your commission down to around $1 a contract then this could be a big negative associated with weeklys.

Using monthly options wins the transaction cost contest.

Now, what of protection? Let’s say I sell the April monthly covered call for 37 cents and you sell the Mar4 weekly for 16 cents. Then USO plummets. Initially I have more than double the amount of protection as you. My call premium will offset a 37 cent drop in the stock yours will only offset a 16 cent drop. Now, sure you can roll to bring in more premium but so can I. That doesn’t negate the fact that traders who short monthly options carry more protection than those with weeklys.

From a downside protection standpoint, monthly options are superior.

One final comparison of note is liquidity.  Monthly options are more liquid. The open interest is virtually always higher, the bid-ask spreads tighter. As a result the slippage suffered using weeklys is arguably higher.

If you’re concerned with liquidity, monthly options are your go-to.

There’s your match up. I consider monthly options more conservative, weeklys more aggressive. As usual, pick your own poison.

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4 Replies to “Tales of a Technician: Covered Calls: Weekly vs. Monthly”

  1. ERICSIMMS says:

    Many thanks for the education, Tyler.

  2. KEITHGIUNTA says:

    How timely. I’m at the point where I’m trying to decide the answer to this very question. Thanks Tyler.

  3. BrandonWeaver says:

    Yes! Fantastic comparison. Much appreciated. That clears up quite a few questions.

  4. CHUCKDAVIS says:

    Good info, thanks again.

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