5 reasons why I prefer monthly options over weekly option contracts
When I started trading options on my small account, I was trading weekly contracts. This was huge a problem for me, because weekly contracts destroyed my small account. As someone who is working as a full-time software engineer, I don’t have every minute to look at charts.
I quickly learned 2 major rules after destroying my small account.
- Protect my capital
- Get a high of a return as possible WHILE still following rule #1
When I made the move the monthly contracts, my account started to grow at a faster rate. Here’s a quick overview of why I prefer monthly contracts over weeklies–especially as someone who has a full-time job.
- Slower Time Decay
- Time
- Can Close the Position Early
- Get Pay More Upfront with Less Trades
- More Consistent High Probability Trades
Okay, let’s go more in depth on why I prefer monthly contracts over weeklies.
Reason #1: Slower Time Decay
Every option contract has an expiration date, and every contract has theta.
In a nutshell, theta is a numerical value that will deduct the value of a contract as the day goes by. Weekly options have a tendency of having high theta values, which is what makes them very volatile, when the stock is moving sideways. Time is always against you.
The image above is a picture of $SPY put contracts that expire on July 27, 2022. They expire in 2 days from the day this picture was taken.
On the right hand side, you can see the Theta column. Every day that goes by, the contract premium will be subtracted by the theta value. Any theta value over 50¢ is considered high risk.
Now let’s take a look at the theta value of a month out contract.
As you can see, the theta value is less than 20¢. That means you don’t have to worry as much about your contract losing premium value if the stock is consolidating; aka moving sideways.
Stocks do not only move in 1 direction, through out the day they move sideways before picking a direction. And during the time theta is going to eat up your contract premium. Avoiding high theta will give you a higher probability of having a green trade
If you like to read more in depth about theta, give this article a read: An easy guide to Theta in options with examples.
Reason #2: Time
Sometimes, there’s where the technical analysis looks great but a wild story comes out, and causes the stock fall or rise sharply.
If you’re trading weekly’s, stories like those can stop you out of your trade in a blink of an eye.
When you’re trading a monthly contract, sharp upticks or downticks won’t hurt your position as much, and will keep you in the game longer.
Reason #3: Can close the position as early as possible
Here’s an example of a trade I took in July 22, 2022 for a $350 put on $SPY with an expiration of August 19, 2022.
That same day I was able to close the majority of my contracts for a 24% gain.
Just because you have a month or greater expiration contract, doesn’t mean you can’t close the option contract early.
You can close your monthly contract out early and capitalize on those gains!
Reason #4: Get pay more upfront with less trades
Weekly contracts are cheaper with high volatility. With that said, with proper risk management, I can only put 4 to 5 percent of my portfolio size per trade.
But with monthly contracts, I’m able to allocate 10 to 15 percent of my portfolio size per trade because of the low theta and because I have more time for the stock to play out.
With monthly contracts, you’re also getting a higher delta. When you’re delta is dramatically higher than your theta, your contract has a high intrinsic value.
Reason #5: More Consistent High Probability Trades
Our #1 goal as an option trader is to protect our capital. Our #2 goal is to get a high of a return as possible WHILE protecting our capital.
I personally wouldn’t want to trade my hard earn cash on only high volatile stocks or contracts. From my experience, that’s a recipe for disaster.
By trading monthly contracts, I’m able to trade a stock for a longer period of time, add nice amount of cash back into my account, while minimizing my risk.
At the end of the day you want to be the house, not the gambler.
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