I have always been a little wary of the trading the weekly options for an income portfolio. Inherently, I was thinking the risk reward makes no sense. The argument I always get is that options decay the most in the final few days. Yes and no, as I have stated over and over again the decay curve that is always pointed at is only applies for ATM options!
This thought process was confirmed to me by a close friend who happens to work at the one of the exchanges. He was explaining to me that the weekly’s standard deviation is not 1/4 the size of a month out standard deviation, and the return is not as high. I am probably going to write a longer piece on this for OptionsZone, but I thought I would do a quick comparison of how a SPX weekly condor compares to an SPX month out condor. To do so we go back to July 22nd.
SPX July weekly standard deviation (7 days), based on ATM IV-32.71. This means that 2/3 of the time the SPX will move less than 32.71 during that week and 95% of the time it will move less than 65.41.
SPX one month standard deviation (28 Days) based on ATM IV-65.38 meaning that 2/3 of the time the SPX will move less than 65.38 during that 28 day period.
That is right, the July weekly in 25% of the time has a standard deviation that is over 1/2 the size of the month out. For those that would think the expected movement of the weeklies would be 1/4 or less this is a big burst to your bubble. This basically says the trader is taking on over 50% of the risk in a trade that has only a week to develop. Many do not realize standard deviation is not linear!
Clearly the risk associated with weeklies is disproportionate to how long the trader is in the trade; hopefully the premium collected is the same. That would possibly make this trade viable.
SPX Weekly Condor shorts set at the 15 deltas-In this case we have to go a little outside. We sell the 1025-1050-1125-1150 iron condor and collect about $4.00
SPX one month condor set at the same strikes-if we sell the exact same spread in August we collect 10.90. That is more than 2.5 times the premium collected for the weekly.
If you were a gambler assuming 2 games have the same cost, would you rather play a game that you will win about 2/3 of the time and you would win 4 dollars, or would you rather win 1/3 of the time and win 10.90. The answer is certainly 10.90. For those that trade weekly's you would want the monthly to pay less than 8 dollars based on the risk.
An interesting note: If we had put the strikes at the same deltas instead of the same strike we would sell the 1030 have collected about $6.00. This is actually what we would expect relative to the risk of the trade.
I can see both arguments for the weeklies. Here is what I would say. I think it makes sense for the trader to possibly trade these suckers if he or she is convinced that the market will not be moving over the next week, or possibly if IV's in the front get out of whack. However, if one tries to trade these every week for an entire year, vs. trying to trade the regular months every month, over time the weekly trader will lose.
I am not even touching on how I don't think either AUG or the Weekly is the most efficient sale, that is info for Option Pit students we are mentoring only (or at least those smart enough to come to the free AM Pit Report)!
I will be piecing together a far more detailed article for OptionsZone, but I thought this would be a really interesting point of discussion, as there is a case for these condors. It also appears that weeklies will be the subject of this months Expiring Monthly, if you aren't a subscriber, you should start.
