High-Probability Trades: Strategies for Trading SPX Weeklys Options

Articles From: Cboe Global Markets
Website: Cboe Global Markets

Jobs reports, Fed policy meetings and earnings could trigger a large move in the S&P 500 Index. For options contracts that expire on a specific event day, it could mean higher implied volatility. And higher volatility generally means a higher premium.

With SPX Weeklys options (SPXW) expiring every day of the week, you can now target exposure to a single event and select expirations that align with company news or market events. Remember, you’re trading short-term contracts, which have high gamma. That means a small change in the value of the S&P 500 could magnify gains and losses in the weekly options.

Short-Term Weekly Options Strategies

Given the dynamics of weekly stock options, you’re likely looking to get in and out of trades quickly. You’ll want to focus on high-probability trades that could potentially generate short-term profits. The catch? They come with higher risk.  

With that in mind, here are a few strategies to consider when trading SPX Weeklys options:

1.) Buying puts or calls. You can buy SPX Weeklys call or put options to hedge or speculate on short-term market moves. Say you have a portfulio of several equities, or even a few ETFs, and you’re worried the market might sell off in the next couple of days based on an upcoming news report. You could potentially protect your portfulio by purchasing an SPXW put option. If you think the S&P 500 might have a larger-than-normal move from an economic report and you feel strongly that the index will move up, you might consider buying an SPXW call option.

2.) Selling vertical spreads. These are defined risk strategies you could use to potentially partially offset the losses of a long position. For example, maybe there’s a Fed pulicy meeting in a day or two. It’s been hyped up, but you think nothing is likely to happen. You could consider selling a call spread on the vulatility.

3.) Iron condor. If you have a neutral outlook on the S&P 500 and think it will be range-bound in the short term, you might consider putting on an iron condor.

Let’s look at some examples of these strategies.

Trade Around Specific Events: Buy Calls or Puts

Say the S&P 500 is trading at 4390 and moving lower. You expect a weak jobs report the next day and anticipate the index will continue falling. To protect your portfolio, you decide to buy the 4385 put that expires in two days for $19.60. The S&P 500 did what you expected and closed at 4271. The value of the put option rises and you sell it for a profit, which helps cushion your portfolio’s losses. If the market instead moves up, your portfolio would increase in value, but you’d lose some or all of the premium you paid for your put. It’s like paying a premium for an insurance policy but you never make a claim. That’s one of the risks of trading single options.

What About Risk-Defined Strategies?

When selling SPXW options spreads, you’re looking for relatively high volatility so you can collect a higher premium. If you go too far out of the money (OTM), you’re not going to take in much premium and your max loss will likely be higher than the net credit. So you’ll need to look at different strikes and expirations when deciding which calls or puts to trade.

Selling a Call Vertical Spread

Using the same hypothetical scenario as before, let’s say the S&P 500 closed at 4630. With the upcoming Fed policy meeting, you decide to sell a call vertical spread and:

  • Sell 1 SPXW 4635 call for $34.60
  • Buy 1 SPXW 4640 call for $33.00

 Net credit = $1.60

 Max loss = $3.40

The best-case scenario would be if the S&P 500 closes below 4635. Both options would expire worthless and you’d get your $160.

You might find a slightly more favorable risk-reward trade-off by selling an iron condor, which consists of a short vertical call spread and a short vertical put spread.

Iron Condor: The Four-Legged Trade

Maybe you have a neutral view of the market and think the S&P 500 will stay within a certain range on a week when the five highest cap-weighted stocks within the S&P 500 are reporting earnings. You could consider selling an iron condor using SPXW options—an OTM short put spread and an OTM short call spread.

Let’s say the S&P 500 was at 4467. You decide to sell an iron condor (see risk graph below) and: 

  • Buy 1 SPXW 4460 put for $32.70
  • Sell 1 SPXW 4465 put for $33.40
  • Sell 1 SPXW 4470 call for $18.80
  • Buy 1 SPXW 4475 call for $17.50

Net credit = $2.00

Max loss = $3.00

To get your max profit of $200, you would want all four options to expire worthless. For that to happen, the S&P 500 needs to be between 4465 and 4470. If it looks like it might go outside the range, either to the upside or downside, you could choose to adjust the spread that appears to be vulnerable. Since you’re selling options, the accelerated time decay of short-term options could work in your favor.

The Potential Downside of Trading Weeklys

SPX Weeklys options offer added flexibility by allowing you to target specific market events. But because they’re short-lived, you should monitor the trades closely. A small movement in the S&P 500 could quickly turn profits into losses.

And if you plan to trade weekly options more frequently, you should incorporate additional transaction costs into your profit and loss calculation.

Probability Risk Trade-off

Trading SPX Weeklys options is like trading their longer-term counterparts; however, you assume a greater risk to put on a precisely timed position. The precision afforded by Weeklys also means you should have more discipline as you may not have much time to fix a trade gone bad.

The Bottom Line

SPX Weeklys options allow traders to leverage volatility, aligning their moves with singular events in the market or a company’s business plan. Harnessing this precision can translate into large gains or losses in short periods of time. 

Originally Posted July 28, 2022 – High-Probability Trades: Strategies for Trading SPX Weeklys Options

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Disclosure: Multiple Leg Strategies

Multiple leg strategies, including spreads and straddles, will incur multiple commission charges.

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