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Stocks & Commodities V. 32:1 (32-35): The Weekly Options, Part 1 by John A. Sarkett

O
ptions mentor Dan
Sheridan describes the
particular appeal of
weeklys — options that
expire each Friday versus traditional
monthly options that expire every
third Friday — quite simply: “Higher
yield,” he says, “and less risk — that
is, if your strategies and tactics are
sound. That and it suits ‘type A’ per-
sonalities better, with more results
in a shorter period of time. It’s like
Pac-Man level 5.”
Sheridan leads some 1,500 mentees,
all trading live, around the globe. The
newest and hottest product in the vir-
tual “workroom” is this very option
product — the weekly option.
He compares a weekly to a tradi-
tional monthly option trader this way:
“He may place $50,000 in a 40-day
iron condor, with an eye to earn 5%,
or $2,500. Using weeklys, he could
allocate $10,000 to a weekly iron
condor, and expect to earn the same
$2,500, but in this case, generating a
25% return.”
That’s five times the return. Is
it any wonder that the volume and
market share of weeklys compared
to all options traded have grown so
dramatically in recent years?
Sheridan adds that the less-risk part
comes from being out of the market
for a greater percentage of the time.
“Many of our traders are putting these
on eight or nine days before expiration
and are only in the trade two to three

NIKKI MORR
days; so at least two days per week,
they are usually on the sidelines and
can’t get hurt.” He continues, “With
a huge up market for most of 2013,
most of our weekly traders are positive
A Faster Game For Bigger Returns for the year, getting better results than

The Weekly Options

those who just stick with monthlys.”

Their history
Still considered relatively new, the
Part 1 Chicago Board Options Exchange
(CBOE) first listed weeklys on SPX,
XSP, OEX, and XEO indexes in Oc-
They were introduced in 2005 and have gained a strong following. tober 2005. In June 2010, the CBOE
How do you trade them? In this first of two parts, see how one trader added weeklys on four exchange
uses these options. traded funds (ETFs): Standard &
Poor’s Depositary Receipts (SPY),
by John A. Sarkett Nasdaq-100 Index Tracking Stock
Copyright © Technical Analysis Inc.
Stocks & Commodities V. 32:1 (32-35): The Weekly Options, Part 1 by John A. Sarkett

OPTIONS

SPX WEEKLYS
300,000 30

250,000 25
Average daily volume (ADV)

on days that weeklys exist*

Percent of all SPX
200,000 20

150,000 15

100,000 10

50,000 5

0 0
Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

Mar-13

Jun-13
SPX weekly ADV Weekly of all SPX *Starting 5/31/12. SPX Weeklys exist every week

CBOE
Figure 1: increasing popularity. Here you see the growth in volume and market share of the SPX weeklys.

(QQQQ), DIAMONDS Trust, Series 1

(DIA), and iShares Russell 2000 Index RUT OPTIONS
Fund (IWM). In July 2010, the CBOE MARKET SHARE OF WEEKLYS
added the new series on Thursday (vs. @ most active exchanges with approx.
Fridays). They also added weeklys in two-thirds total RUT option volume: ISE, PHLX
GLD, XLF, EEM, C, BAC, AAPL, BP,
F, and GOOG. Mar-13 ADV
Since then, the option exchanges have
added more series of options — that is, Feb-13 ADV
instead of just expiring the next Friday,
many weeklys are offered for the next five Jan-13 ADV
weeks, with shorthand designations such
as AUG1, AUG2, AUG3, AUG4, AUG5, Dec-12 ADV
meaning the first Friday of August, the
second Friday of August, and so on. In Nov-12 ADV
addition, weeklys on more and more
underlyings have been added to meet Oct-12 ADV
the demand, most notably in heavily
traded individual stocks. 0.0 5.0 10.0
20.0 15.0
25.0 30.0 35.0 40.0 45.0
Percent

The appetite Figure 2: the migration is on. Here you see the market share gains for one series of options (RUT) from
October 2012 to March 2013. ADV stands for average daily volume.
is there
Demand for these new finan-
cial tools has been voracious.
You can see a list of available weeklys at http://
www.cboe.com/micro/weeklys/availableweeklys.
aspx. It’s a huge list and keeps growing. Weeklys are attracting more
Figure 1 shows the growth in volume and market share, for attention, more traders, more
example, on SPX weeklys. volume, more share.
In Figure 2, you see market-share gains for one series of
options (RUT) during one recent six-month period. ADV here
stands for “average daily volume.”
Copyright © Technical Analysis Inc.
Stocks & Commodities V. 32:1 (32-35): The Weekly Options, Part 1 by John A. Sarkett
OPTIONS
How do you trade them?
The trend is unarguable: weeklys are attracting more attention,
more traders, more volume, more share. But if you haven’t
dipped your toe in the weekly waters, how do you proceed?
I asked four experienced successful traders for their strategies
and tactics on profiting from weeklys. I got back a varied set
of responses, but it is safe to say that weekly options offer
traders enhanced profit opportunity vis-à-vis their longer-
dated ancestors.
Don’t think butterfly,
think debit spread
Often acknowledged as a top-tier retail
option trader, Ed Tulauskas of Mebane,
NC traces his education in options
back to Optionetics in 2005. “I would
site in my car during my lunch hour
trying to grasp the concepts, strategies,
and greeks.”
He came in contact with option mentor Dan Sheridan in
2008, learning of his services by attending one of his CBOE
seminars. (There, he won a Portillo’s hot dog dinner by
answering a trivia question.)
Fortified by his instruction and the brotherhood-in-arms, he
has been trading the Apple (AAPL) weekly for three years,
diligently applying Sheridan’s method of trading the same
vehicle, same strategy, and putting on the trade every week,
which would be the equivalent activity of trading monthlys
for 12 years. That’s a lot of experience: in excess of 150 initial
trades, plus two to three times that amount in adjustments. He
is the veteran of more than 500 trades-plus-adjustments on
AAPL, and he knows every hair on the Apple beast, at least
in terms of intraday movements.
He has developed a method that has been successful
enough to generate a 4–6% weekly profit. His target profits
are $1,200 to $1,400 per week, or some $5,000 monthly
profit on $20,000 allocated capital. He cuts his losses at 1.5
times expected gains; if he is ever down about $1,950 (1.5 x
$1,300 average target profit), he exits. He focuses on where
the risk is in his trades first, and then looks at the profit side.
His system is that robust.
Here’s how it works. The weekly AAPL trade starts mid-
day Monday. He will put on an at-the-money iron butterfly,
20 points wide. For example, if AAPL is at $500, he would
sell the 500/480 put credit spread and the 500/520 call credit
spread. And, indeed, he will often enter this as two credit
spreads versus one butterfly. He aims to collect $10.00+ for
the entire butterfly.
By the end of the day, however, to flatten his risk curve,
he will add, at the wings, protective debit spreads, both puts
& calls. These wings, together, might cost $2.80 or so (up
to 15–20% of the credit received from the iron butterfly).
This flattening of the risk curve reduces risk but also reduces
profitability. It’s a tradeoff he is happy to make.
Tulauskas then enters OCO (one cancels the other) orders
for market moves, both up & down. If AAPL moves down, he
Copyright © Technical Analysis Inc.
Is it any wonder that the
volume and market share
of weeklys have grown so
dramatically in recent years?
will buy another put debit spread at a lower level. If it moves
even lower, he will sell a half-size put credit spread — in ef-
fect, creating another butterfly at a lower level. He does this
in anticipation of and protection against a whipsaw move
back to the upside.
What if AAPL moves even lower? He repeats the process
yet again: buy 10 put debit spreads; if the stock continues
lower, sell five put credit spreads. Price-wise, he might buy a
10-point wide debit spread for $2 or less. At the same time,
he might exit a call credit spread previously sold for $2.25 at
$0.20 or less. The same process is repeated to the upside.
There are a lot of buttons and dials and determinations to be
made here, to be sure, and you might expect Tulauskas to be
chained to his desk and screen to make all the moving parts
go, but actually, he’s not, Ed has a day job. He plans his trades
in advance and does it all through previously entered OCO
or trigger orders. So the surprises, should they come, are few
and far between. Tulauskas has already provided for them in
his schema, and even more important, in the market.
With AAPL, the volatility can be high and the moves
sharp, so why choose AAPL? Tulauskas says that since it is
volatile, there’s always enough juice in the outer strikes to
make them tradeable as debit spreads. For him, since he has
done it for three years, week after week, the game actually
slows down for him; he is not put off by the momentum and
pace. In fact, he profits from it. And again, the trigger orders
are sitting in the market waiting for the fireworks to come his
way. Once he makes his plan, he almost becomes something
of a spectator.
Reconceptualizing a bit, one might say he gamma scalps
the up & down moves of AAPL, buying puts in anticipation
of a decline, buying more, and then selling at half size to
capture profits.
Commenting on his student’s success, Dan Sheridan said,
“The way Ed manages his trades, there is never a panic. Even
a gap down or up wouldn’t hurt too much because his T+0
line [time plus zero, or current P&L] is so flat. If we move
moderately or gradually outside of the profit tent, the debit
spreads or longs he adds may be likened to back ratios or
straddles. It is a complex system and not one recommended
for a newbie, but for someone who has been mentored and
continually studies and hones their craft, like Ed, over time,
it is doable. Ed has proven that.”
Sheridan further lauds his student’s persistence: “Regardless
of charts and technicals, Ed puts on positive theta trades each
week, and adjusts with debit spreads or longs when it moves
Stocks & Commodities V. 32:1 (32-35): The Weekly Options, Part 1 by John A. Sarkett

outside the profit area.” Although many

students started trading AAPL weeklys
when Ed did, he stuck with his method
and that made all the difference.
Tulauskas believes in some ingredients
in the option training regimen that aren’t
necessarily strategy, tactics, or greeks
per se: getting good sleep and nutrition.
“I am interested in how nutrition affects
memory, concentration, cholesterol, and
a trader’s decision-making. Emotions
should be checked at the door and not
used during trading hours.”
He spoke on these themes at the 2013
Sheridan reunion (some 150 attend the
annual Chicago confab held in June of
each year), and received much comment
and many questions. “I could do a semi-
nar on nutrition,” he says — and you get
the impression from this corporate leader
that it’s already in the works.
This is just one way to trade weeklys.
In part 2 of this article, you’ll find out
how three other traders found success
trading these options.

A regular contributor to this publica-

tion since 1995, John A. Sarkett is the
author of Option Wizards: Real-Life
Success Stories From The Financial
Markets (http://option-wizard.com).
Dan Sheridan can be reached at dan@
sheridanmentoring.com.

Further reading
Gentile, Tom, with Chris Tyler [2011].
“Weekly options,” Explore Your Op-
tions, Technical Analysis of Stocks &
Commodities, Volume 29: June.
Gentile, Tom [2013]. “Put or call: Which
has the most liquidity of all,” Explore
Your Options, Technical Analysis of
Stocks & Commodities, Volume
31: May.
• http://www.cboe.com/micro/weeklys/
availableweeklys.aspx.

‡See Traders’ Glossary for definition

Copyright © Technical Analysis Inc.

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