Until recently, I had a terrible habit of selling weekly options. I don’t just mean the options that happen to expire on days other than the third Friday of the month; I’m saying that I would sell calls and puts that were to expire in 5 days or fewer. The allure of quick, easy profits would get the best of me, week after week. After all, what could be more enticing than taking advantage of the steep cliff dive in the final days of the well-known theta decay curve?

I figured, if I’m going to (financially speaking) push the guy on the other end of the trade off of a cliff… might as well make it a really steep cliff, right? And that part of the curve on the far right end of the chart, representing the final days before option expiration, is about as steep as it gets. So there’s your reason not to buy very short-term options: sure, they’re cheap, but they’re cheap for a reason. The time value portion of short-term options deteriorates in value rapidly and disappears entirely upon expiration.

Figuring that if one side of the trade is a bad deal, the other side of the trade must therefore be a really good deal, I would blithely sell calls and puts for ten cents apiece. Looking back, it’s amazing that I didn’t get clobbered doing this. I attribute this to pure luck and a market that has slowly ground upwards since early 2016. I didn’t deserve to escape with my trading account intact, but somehow I did.

What I was doing was, in effect, picking up dimes in front of a steamroller. You see, just because the buy side of the trade is a bad deal, doesn’t necessarily mean that the sell side of the trade is a good deal. The fact is, given the massive gamma risk in the final days prior to option expiration, the sell side of the trade is a terrible deal in terms of risk-to-reward: the reward is measured in nickels and dimes, while the risk is measured in dollars.

If you sell a short-term option for a dime per share, and the trade sharply goes against you in the final days before expiration, you may have to buy back that same option for a dollar or more. The gamma of the option that you sold will probably increase, thereby magnifying the theta of that option and quickly expanding the price of the option; if the implied volatility also increases, this could inflate the option’s price even more. And, there likely won’t be sufficient time to manage the trade in a cost-effective way. What seemed like easy money could quickly become a nightmare.

So now, I’m committed to the practice of selling options with 30 to 60 days until expiration when volatility expands and prices get to extreme or unjustified levels. That way, I’m paid sufficient premium to take on the risks involved, and the risks are somewhat mitigated by the fact that I’ll probably have enough time to allow the trade to work itself out if it goes against me in the early stages. Then, by liquidating the trade (and hopefully taking profits) halfway until expiration or earlier, I’ll won’t have to deal with the gamma risks involved in near-expiration trade management.

Thanks to mentors and friends such as Seth Golden and David Lincoln, I’ve learned an essential lesson without having to learn it the hard way. Weekly options: don’t buy ’em, don’t sell ’em. Just leave ’em alone.

  1. Sunil Narayana 6 years ago

    Thank you for the great article. I always surprised how easy to make money until i learnt my lesson:-)… Its so tempting. Thank you reiterating with a master piece..!! People talk a lot about rolling into future, but it was not looking worth… (I could be wrong)

    • Author
      David Moadel 6 years ago

      Thank you very much, Sunil, for the nice comments. I agree with everything you said. It’s very difficult to roll an option sale in a cost-effective way when it’s going against you sharply and there’s very little time left until expiration. We must avoid temptations that will harm our investing accounts!

  2. kellykline 6 years ago

    Thanks, @david-moadel! I was doing this (picking up pennies) recently. Took my profits and staying away from the steamroller.

    • Author
      David Moadel 6 years ago

      Thank you for the comment, kellykline. Beware the steamroller! Picking up pennies, nickels, and dimes isn’t worth the massive risk, in my opinion.

  3. Hien Nguyen 6 years ago

    I experimented with the same strategy before, and it worked for a while, with a high winning success rate. Then it didn’t work, and boy, it didn’t work 🙁 Once that volatility spike occurred, selling nickels turned into losing quarters, and then dollars :/

    • Author
      David Moadel 6 years ago

      Exactly! Thank you, Hien, for the comment, which precisely sums up what I was attempting to express.

  4. Sunil Narayana 6 years ago

    Would it work if its done as a credit put spread.

    • Author
      David Moadel 6 years ago

      Hello Sunil, selling a spread instead of an uncovered option would certainly reduce the overall risk, but is also likely to greatly reduce the profit potential.

  5. Steven Horner 6 years ago

    It works better if you make it a credit put spread. I know someone that does this regularly but they are an expert who feels very comfortable rescuing any trade regardless of how bad they were smashed down. I have been smashed hard selling cheap SVXY puts even when they were about $15 lower strike (and went another $4 below strike where I got assigned), but have also got lucky every time i sold the day before expiry.

    If you do it you should only do it with stocks you are comfortable owning when they are down and then keep selling options that work to reduce cost basis. Or setup other strategies like reverse iron condors and broken wing butterflies. That’s where being an expert comes in really handy.

    • Author
      David Moadel 6 years ago

      Thank you for the insightful comments, Steven. Selling spreads instead of uncovered options is definitely an effective way to reduce risk, though it does also reduce the profit potential (there’s always that trade-off…).

  6. Sunil Narayana 6 years ago

    Thank you David & Steven….very helpful tips:-)…

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