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Monday, November 21, 2011

Weekly Options - Weekly Option Strategies

By Ted Nino

One way to trade weekly options that could be considered 'less risky' - at least when compared to other similar ways of trading - is to go out and purchase a LEAP option - use that as the foundation for the trade - then start to sell weekly options against it - similar to how one might trade a covered call trade.

Using LEAPS with the new Weekly Options

The term LEAPS stand for long-term equity anticipation securities. These options have much longer life span than monthly or weekly options - rather than expiring in 30 days or less - these LEAP options can have time spans of several months up to several years away. Something else to point out is that when you look at what their name stands for - you will see that these things are not even options - they are actually securities.

One way to think of LEAPS is to think of them as leasing options rather than purchasing them. When you are using LEAPS you can benefit from the movement in stocks in a similar way as if you owned the stock - only without having to put out as much money and with more more leverage.

Example of using LEAPS with AAPL stock along with Weekly Options.

Let's say you want to take a position in AAPL - but you don't want to put up the amount of money it would take to create a stock position. You can instead use an AAPL LEAP option - let's say an 'in the money' option with a fairly high delta - and due to the smaller amount of money needed to invest in this type of position - one could still create a much more affordable similar type position to take advantage of an opportunity.

Another potential scenario is buy the LEAP as in the example above - but then to use the LEAPS in conjunction with weekly options - using the LEAP as a 'stock replacer' - and essentially building an option trading position that is very much like a covered call trade. In this type of a set up, the LEAP position would act as the long (or short) stock - and then the trader would begin to sell weekly options against the LEAP position - and this could potentially be done many times in a row - up to 52 times in the year - all the while pumping out cash flow from the sold weekly options. What is even better with this scenario becomes apparent when you compare what you could make with a similar 'stock based' covered call play versus this type of LEAP surrogate stock weekly options trade - where the returns on the LEAP version is far, far better than the possible returns with the stock based scenario.

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