Part 2 – About Weekly Options

The Advantages and Disadvantages of Trading Weekly Options

Retail technical traders need to carefully consider not only what financial market they want to trade but also which of the numerous instruments now available to trade will be ideal for their trading style, risk tolerance, capital base, experience, and trading process.

All too often retail traders learn Technical Analysis and a few strategies, then assume they know how to trade. Unfortunately Technical Analysis in and of itself is not knowledge that teaches a trader HOW to trade. In addition, strategies without a complete process will create inconsistent results and unreliable trading.

One aspect most retail traders lack in their education, is the proper way to select which trading instruments they will use for a specific financial market. Trading the Options Market is no exception.

Is the instrument a derivative, and if so how does the new instrument impact the underlying asset upon which the instrument is based.

As a Derivative Based Financial Market, it is tied directly to the Stock Market and is constantly under the invisible pressures, currents, and trends of the stock market. It is not isolated from the stock market, nor are the participants solely trading options. Most of the Market Participants trading options are heavily invested in stocks as well as other trading instruments.

Not only is the options market sensitive and reactive to the stock market, it can also be impacted by Futures, Currencies, Bonds, other Derivatives, and Credit markets as well. All of these markets are connected to the stock market in some form or another, and the professional side of the market uses these instruments in a variety of ways to augment complex quantitative based portfolio management.

The first aspect of whether Weekly Options are the right instrument for you is to determine which Market Participant Groups use the Weekly Option and the purpose of its use. What Market Participant Group(s) are the trading instrument designed for, and how this new instrument improves their profitability. What are the primary uses of the trading instrument for the Market Participants for which it was designed.

Weekly Options were not designed or developed for the retail option trader. These specialty options contracts were implemented for the use of the Buy Side Institutions primarily, the Sell Side Institutions, and also to some extent the Smaller Funds Managers.

The purpose of the Weekly Option was to create a shorter term option contract for the giant institutions who use options as a means of insurance, when they had purchased a short term or high risk stock position worth millions of dollars.

The risk level and risk factors of this new instrument, in relation to traditional or older style well known instruments that have been used for decades.

For example, a common purpose for the Weekly Option is when a giant fund buys millions of shares of stock and wishes to insure against downside risk. The giant fund used to buy the standard option contract, but the older style contract was generally a longer period of time than was necessary, needed, or wanted.

The giant fund buys a giant lot of stock, then buys option “puts” as an insurance policy. This is standard procedure and is used constantly by the Buy Side Institutions, and many Sell Side Institutions that are trading millions of shares of stock on a short term basis.

What benefits does the new trading instrument provide to the Market Participants for which it was designed.

The Weekly Option contract is an ideal solution, because often the insurance policy only needs to be in place for a short period of time as the institution waits for the stock to move up. The buy puts provide sufficient downside risk at a very low cost, in relation to the risk of the stock price moving down. The options will expire worthless, but the cost of the Weekly Option puts is minimal to the giant institution when they have millions of dollars at risk in holding the stock.

What new strategies, techniques, and parameters does a retail trader need to learn before using this new trading instrument.

There are many strategies and systems that are taught to retail traders that are not based on the facts of the Options Market. As an example the put/call ratio strategy which wrongly assumes that a high level of puts tells the retail trader that those buying puts know the stock price is moving down so they should buy puts too. This is a totally false assumption and is a primary cause of options losses for options retail traders.

The put/call ratio can easily be skewed by a giant institution buying puts as an insurance policy against a higher risk short term stock trade.

The retail trader who is unaware of the reality of the Weekly Options contract, thus is trading the wrong side of the Option. With only one week hold time, there is risk of the stock moving up quickly due to a High Frequency Trader HFT trigger, that can gap or run the stock suddenly as HFTs discover the giant institution huge lot buy order of that stock.

Although options trading requires lower capital, losing capital when a retail trader starts out with a smaller base is not an acceptable scenario. Many small losses add up to a much larger loss over time. Weekly Options were not designed for the novice or beginning options retail trader. They were not designed for the retail options trader at all.

What additional training or education is needed to trade the instrument.

If a retail options trader wants to trade Weekly Options, then they must learn how and why Dark Pools trade options, when and where HFTs will move price, Relational Analysis™ of the stock chart to determine direction the stock will take, and the risk analysis of both the stock and the option.


When a retail option trader has the knowledge, experience, and ability to implement a complete trading process for Weekly Options, they can be successful. Unfortunately most retail traders are not prepared for the risk factors of Weekly Options, nor do they understand what the other much larger Market Participant Groups are using Weekly Options contracts for and why these options are traded.


Here is the link to Part 1 – About Weekly Options

This is Part 2 of a three part series of articles on Weekly Options. We will review each of the questions in Part 1 with specifics to the Weekly Option, comparing these newer options contracts to the standard 1-3 month contracts. By the end of the series retail traders will have a strong understanding of whether Weekly Options are right for their trading style, trading process, and risk tolerance.

What are Options in general:

An option gives the buyer the right (but not the obligation) to buy the underlying asset at an agreed upon price within an agreed upon time frame. Options are a derivative, or secondary, market. Options can be based on stocks, indexes, ETFs, and more. That means that the ability to make profits in options depends upon a primary market. So in order to be successful at trading stock options, you need to have a solid understanding of how to determine when a stock is poised to move, which direction it is going to move, how much it will move, and how long.

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Trade wisely,

Martha Stokes CMT

Chartered Market Technician
Instructor and Developer of TechniTrader Stock & Option Courses
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