Weekly Covered Calls – Accelerate Your Returns

Weekly covered calls are short term options that expire every Friday. This gives you a greater level of flexibility with the options that you wish to trade. If you own existing stock, or are looking to purchase for a covered call trade, then you can compare your monthly premium to the weekly premiums available on the day. You can then match your trade to the optimum mix of time vs return to suit your circumstances.

If you are employing a weekly covered calls strategy only, then you can trade 52 weekly cycles per year. This can accelerate the rate of compounding of your investment capital as you bank those weekly premiums.

The shorter time frame also reduces the risk of an adverse price movement that could hurt your profitability of your trade. With this reduced time frame is a smaller time value incorporated into your premium. But this is where you can spot inefficiencies in the market.

It is not uncommon for weekly call option premiums to jump when there is some positive price momentum. If you can bank 2/3 of what a monthly call option premium is worth for a weekly trade then you can see how this strategy can boost your earnings.

With high turnover of your trades come higher brokerage costs. This can eat up a large portion of your profits, especially if you are entering smaller positions. So you will have to account for this when comparing your weekly to monthly premiums.

For the New Trader

For the inexperienced investor, writing in the money (ITM) weekly covered calls can be a low risk way to get some experience trading in the market before you look at higher risk strategies.

We have discussed Deep in the Money Call Options previously as a good low risk option also. For weekly trades you may not find premiums worth the trade on most occasions and may have to stick to monthly to maximise the time value of the option.

The Long Term Investor

Weekly covered calls can be a great for long term investors to add a few points to their returns for long term holdings. If a portfolio has a number of companies that are big, and stable there is unlikely to be any massive price movement in a week. By selling out of the money (OTM) weekly covered call options the investor can add some additional cash flow to their returns which can add up over time.

Each trade will also protect on the downside risk. Each premium banked will reduce the investors break even point on a stock. If they are prepared to hold long term anyway some short term losses would not be a cause for panic, and they can continue to bank the income each week.

Closing Your Position

As with any option, if expiry comes with the price below the strike price then the option will expire worthless. A new option can be written the following week.

If there is a surge in the stock price above the strike price the following options are to be considered:

  • Do nothing and allow the option to be exercised.
  • Roll up the option by buying back the call, and selling a higher priced option.
  • Buy back the option, allow the price movement to run its course, and then sell a new call as the price peaks.

You should so your numbers and compare the profit outcomes vs risk for each scenario.

No trading strategy comes without risk, but the weekly covered calls strategy can reduce your exposure for any one position, while increasing the velocity of your trade. This can drive profitability, but also your losses if you have a run of bad trades. So start conservative if you are new to this and go for trades with a fair premium and that are at the money (ATM) or just in the money (ITM) to keep your risk at an acceptable level.


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