TRADING WEEKLY OPTIONS ON FRIDAY

THE SIGNIFICANCE OF FRIDAY IN TRADING

In addition to being the last day of the week for the stock market, Friday is also the day on which options expire. When it comes to weekly options, if the Friday in question is the first, second, fourth or fifth Friday of any given month, then it is an expiration day for these options. The third Friday of each month is the day on which monthly options expire, and therefore, there are no weekly options expiring on this day.

HOW DO WE DEFINE TRADING?

At Weekly Options USA, we consider that the purest form of trading options is buying and then selling an options contract prior to expiration, ideally for a profit. There are obviously many other possibilities within the scope of trading or using options, but for the sake of this article, let’s focus on trading weekly options in the way that our trading alert services suggest.  

DAY TRADING WEEKLY OPTIONS ON FRIDAY

There are sometimes factors occurring on a Friday that are expected to cause a dramatic movement in the price of a stock and likewise, its corresponding weekly option. If one or more of these factors coincide with a weekly option expiry date, this may provide an ideal situation for executing a day trade. This means that a trader enters and then exits the trade within the same trading day. A big advantage of buying a weekly option on the same day that it is due to expire is that the premium is typically lower than at any other time, due to the almost non-existent  time value of the contract.

If you are planning on day trading weekly options on Friday, you need to make sure that your broker allows for doing this, as there are some brokers with different rules about trading options on expiration day. You also need to make sure that you are either able to watch the market so you can sell when your option reaches your target profit, or implement a system that ensures the contract will be sold if it is in-the-money. If you are left holding an in-the-money contract at expiration, you typically become obligated to buy the underlying shares.

WAITING TO SELL ON EXPIRATION DAY

Another way to look at the concept of trading weekly options on Friday is to consider the scenario in which you have previously bought a weekly options contract, but are waiting until its Friday expiration date to sell it.

This may be because the price has already moved substantially, but is still continuing to climb, and you believe that waiting until Friday may give you an opportunity to realize a higher profit. This would mean needing a buyer who fits one of two categories.

They may intend to day trade the option and believe that it will increase enough from the price they pay you for the contract, and the price that they will sell it for a couple of hours later.

Alternatively, you may find a buyer who actually wants to exercise the option by buying the shares at expiration for a significantly lower than market price.

There are obviously some risks in taking this approach, as the price may not continue to rise, or you may be unable to sell the contract at the price you want, regardless of the market value.

holding on to a losing position

If you have a weekly option contract that is nearing its expiration day, and has failed to increase in value, or has dropped in value, the only risk you have in holding the contract is that it will expire “out-of-the-money,” and worthless. This would mean that you have lost your premium.

By waiting until the last day with an under-performing options contract, you could possibly have the opportunity to make some profit, or at least break even if the price suddenly begins to rise (or fall in the case of a put).

OTHER SCENARIOS

If you are buying and/or selling weekly options contracts on a Friday that is not the expiration date of the option in question, there are not so many differences to trading at other times.

You might be buying and/or selling a weekly options contract that expires the following week, in which case, your trade would only be influenced by the factors that can affect all market activity on a Friday.

One consideration is a well–known stock market pattern known as the Friday Effect. According to this article from Berkeley, “Stock turnover is generally lower and price movements less pronounced on the last trading day of week.”

IN CONCLUSION

Whether you are trading weekly options on Friday, day trading weekly options, or trading weekly options in general, the same points of consideration apply. Make sure that you have a solid basis for entering all trades, and a well planned out exit strategy.