Using Weekly Options – Utilizing The Butterfly Option Spread To Produce Weekly Option Cashflow

By Duncan Burke

A potentially ‘safer’ way to trade weekly options is to buy LEAPS options as a base position and then turn around and sell weekly options against – very much like how one would do when trading a covered call play.

Some traders refer to this sort of options trading method as a covered write – or sometimes they call it a synthetic covered call technique – and it is true they are similar except for the fact that with this type of strategy the required margin – or capital – can be less. When you are using stock for these types of option strategies, you must put up the entire amount to purchase the stock which can be many thousands of dollars. However, when utilizing options – either regular options or long term ones such as LEAPS – your upfront requirement is only the price of the option – which can be significantly less.

Weekly Options – LEAPS

LEAPS (long-term equity anticipation securities) are longer term options. Instead of expiring in weeks – or a month – LEAPS can have a life span of months and even years. 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. You can take advantage of movements in stocks and ETF’s using LEAPS – which can be much more affordable and provide a lot more leverage.

AAPL example using LEAPS and 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 great weekly options strategy that can be used will LEAPS options is use them as a stock ‘surrogate’ for a covered call type of position. We use the LEAP in place of the stock position – and then we begin to sell weekly option calls against the LEAP – and this can be done every week for 52 weeks out of the year – generating cashflow while assuming far less overall risk. Also, if you were to compare these two strategies against one another – you would most likely find that the return on investment is far greater when using the LEAPS weekly options version.

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