Weekly Options Credit Spread


Weekly Options Credit Spread

Weekly options credit spread strategy is one of the most popular option trade strategies with weekly options. For those that are new to options, a credit spread is where you sell one option that is closer to the current market price and buy an offsetting option at a farther out of the money price.

The option you sold since it is closer to the current market price it then has a higher premium than the farther out of the money option that you purchased. The difference in premiums between the two options generates a credit in your account that you can keep if the options expire out of the money. If this sounds confusing let look at an example.

Weekly Options Credit Spread Example

Say you were looking at XYZ stock priced at $50. You think that in the near term that the stock is going to move up. You don’t want to tie up a lot of money buying the stock so you could use weekly options to sell an out of the money put.

Sell $48 put for $0.80 credit

Buy $46 put for $0.40 debit.

The difference between the $0.80credit and $0.40 debit is a $0.40 credit (or $40 profit per spread). If the stock closes above the $48 strike price then you keep that entire $40 credit. The risk is if the stock closes below that $48 strike price then you max risk is if the stock closes at of below $46. This would generate a $160 loss per spread.($48-$46 =$200 loss minus the $40 credit you received from selling the spread = $160 max loss)

With weekly options you start seeing almost immediate time decay erosion on the options since ever week is essentially expiration week. Whereas, with tradition monthly options if you wrote a credit spread with four weeks until expiration you might not see much time erosion until the last week assuming the stock hasn’t moved in price much.

Put Credit Spreads

A weekly option put credit spread like above can be used if you are bullish on a stock of if you think the stock will just sit and not move. You could also generate even higher credits the closer to the money that you write a spread. For example using the XYZ stock at $50 list above, if you were really bullish on a stock that had just pulled back you could sell a put credit spread that is in the money by selling $52put and buying a $48put to get an even bigger premium credit.

If the stock doesn’t bounce quick enough for you in the week that you sold the in the money put option you could roll the spread to next week or even have the stock put to you if that was you plan(some investors who like a stock and would be happy owning the stock will sometimes just sell puts if the premium is good ever week until the stock is put to them and then start selling covered calls against that long stock.

Call Credit Spreads

A weekly option call credit spread is used if you are bearish on a stock and think that it won’t move any higher. You would sell a closer to the money call option and buy a higher strike(farther out of the money) call option for a combined premium credit. These can be a little riskier than put option because stock tend to move higher over time and if a short call is exercised against you end you have to deliver the stock or just close it out.

Overall credit spreads are a popular strategy with weekly options as you can keep writing new spreads ever week for continued tiem erosion and if the stock moves against you then you can easily roll the same spread to the next week until the stock pulls back or roll it up to higher strikes. There is a lot more flexibility for an income trader with weekly option income trades because your goal as an income trader is generating rapid time decay.

Weekly Options Credit Spread Risks

Realize though that with the short time to expiration with weeklys that you are usually dealing with closer to the money strike prices in order to generate any decent credit premiums vs. monthly options that sell at higher premiums since they have a longer life. This is important to understand in that you might have to manage weekly options credit spread trades more than you would with monthly options if the stock moves around a lot. Image Wikipedia

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