How We Trade Weekly-Expiration Options: Identifying Trades, Picking Entries, and Managing Trades

How We Trade Weekly-Expiration Options: Identifying Trades, Picking Entries, and Managing Trades

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Inside the Elite room of the Rebel Pit, our analysts trade options that are only 5 days to expiration and under. And on our favorite day – Friday – every option is 0DTE. These weekly expiration options are tools we leverage constantly as options traders.

“But aren’t weekly expiration options dangerous?”

They can be in the wrong hands — but not for our analysts, who have spent years on the trading floor and earned their stripes trading through some of the great financial events and crises of the modern era. For traders who really know what they’re doing, weekly expiration options can be some of the most potent tools that the options market has to offer. In this article, we’re going to cover how we trade using weekly expiration options, from identifying a potential trade idea, to pinpointing key technical levels of entry and exit. By the end, you’ll be able to take our strategies into your trading playbook. But first, let’s dispel a myth about weekly expiration options.

Short-Term Options Myth – “0DTE Options are Degenerate Gambling”

The shortest dated form of weekly expiration option is called a 0DTE option. 0DTE options are options that expire on the same day you purchase them. 

Many traders will tell you that 0DTE options are akin to gambling. In fact, this March 2023 article from Bloomberg literally calls 0DTE option trading “degenerate gambling.” However, for skilled traders, these 0DTE options are far from a gamble — they’re a calculated risk, allowing traders to take low risk, high reward trades. When we say low risk, we mean that 0DTE options are about as cheap as options come. Rather than spending $10,000 to gain 100 shares of leverage of a $100 stock, traders can spend closer to 1% of that on a 0DTE option for comparable leverage. Pound for pound – the choice that allows you to risk less capital is inherently lower risk

“But what about the theta?”

While theta decay is a concern, by the time an option reaches its final day, much of the theta has already decayed. Note the chart below.

The chart above depicts the decay of extrinsic value of an option. Theta really starts to decay around 60 days to expiration. That decay ramps up around 30 days, and hits top speed around 15 days. So while there is still some theta in a 0DTE option, it’s really more of a misconception that the theta is what’s changing the value. Truly, it’s actually much more about the gamma. Gamma is the rate of change in delta. Gamma can ramp up quickly in 0DTE options, meaning that small moves in either direction can have a huge impact on the delta, and subsequently the price of the option itself. While we could cover gamma scalping at length in an entire guide (something that we’ll soon cover), we’ll instead boil it down to a one sentence fact: Gamma is at its highest when an option is at the money, and ramps the fastest in short-dated options

So now that we’ve dispelled a couple of myths about short-dated options, let’s talk about how we trade them.

How to Make a Trading Plan for Weekly-Expiration Options

The most important step to every trade we make in the Rebel Pit is crafting our trading plan.

Whether we’re trading short-term, long-term, or anything in-between, our trading plan always contains the same parameters:

  • Option Type (Strike, Date, Call/Put/Spread)
  • Trigger Level (A key level that, if breached, will confirm a breakout or breakdown in price)
  • Exit Levels (These are follow up levels, usually presented as horizontal “flat lines” identifying potential areas of support and resistance, with which it can be beneficial to take profit/roll the trade)

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First, our option type. 

While vertical spreads can be great for negating potential theta decay risk, as we’ve discussed above, theta isn’t as big of an issue in extremely short-dated options. Simply put, there’s just very little in the way of extrinsic value left in these volatile instruments — depending on which one you pick of course. Additionally, when we’re taking a weekly-expiration options trade, we’re looking for a snappy, aggressive move in our direction – and want our trading instrument to reflect that. For that reason, we almost always opt for direct long calls or long puts depending on our directional bias. 

As for the date – we said it already. The shortest-dated possible strike is almost always what we opt for in Rebel Pit Elite. There are momentum trading services that we offer which lean on longer expirations, however the trading strategy and catalyst in those services are augmented to reflect that. In Rebel Pit Elite, we’re diving into the deep-end of the pool, looking for big swings on short time frames. That means no more than 5 days to expiration, and preferably as little as possible. In short: We want to get in and out of these options as soon as possible, preferably within the same day.

And lastly, an important piece, the strike price. We typically opt for high gamma at-the-money options with these types of trades. High gamma means we’ll get a bigger bank for our buck when the option moves a few dollars in our favor, and at-the-money means we are still erring on the less expensive side, allowing us to limit our capital at risk. In the event that the nearest strike price forces us to choose between slightly in the money and slightly out of the money, we always opt for the choice that is slightly in the money if the decision must be made – allowing for a small amount of capital preservation.

So that’s essentially the “constant” in this plan. The options are almost always long puts or calls. They are almost always the nearest dated option available. And they are almost always at-the-money.

How to Identify Short-Term Trade Targets

Once we understand how to craft a trading plan, we have to start filling in the blanks. And there’s no more important “blank” to fill than our trading target. When we’re hunting for short-term trading targets, we always lean on technical analysis. You’ll find it’s another constant in our trading strategy. Often, the technical analysis that we’re identifying for these trades will take the form of a breakdown or breakout in price. 

Breakdowns and breakouts are another way of saying that a stock which has been confined to a certain range is now breaking away from that range. Maybe that means a stock has been respecting its 50 day moving average for a long time, but today, it fell below it. That’s a breakdown. Or maybe a stock has treated a certain price as resistance time and time again — but today, it broke above that resistance. That’s a breakout. In either case, when a stock breaks out or breaks down, it often triggers a period of price discovery in that direction.

We like to identify those “breakout” and “breakdown” areas as levels, which we typically mark on the chart with “flat lines.” Flat lines are horizontal lines across a chart that are significant in some way. As we said above, they might be a recent low point that triggered a market reversal, or the top and bottom of a range that an asset has been trapped within, or a significant moving average that the stock has been shown to respect. Let’s look at an example to help drive home the point. Recently, the SPY suffered a short-term breakdown after it fell below a key level of support:

Given the length of time this trend has remained active, a fast-paced breakdown was to be expected here. At the close on Monday, when SPY closed below the level of support for the first time in months, the at-the-money (or slightly-in-the-money) $421-strike Friday expiring options were trading for roughly $3.70. Here’s how those options aged, and what happened next to the SPY:

Now, let’s make it clear — you wouldn’t have “gained” $978 in profit. Instead, the calculation works like this:

You paid $3.70 for your at-the-money $421 strike Friday expiring option at the Monday close. Only about $0.54 of your option was intrinsic value – the rest of extrinsic. By expiration, all extrinsic value is always removed from your option – leaving only intrinsic value. So then, we know your $421 option was worth $10.32 by the close of Friday – $421.00 minus $410.68 equals $10.32. However, remember, you paid $3.70 to buy that option – that’s your cost basis. So technically, you profited $6.62 — $10.32 minus $3.70 equals $6.62. In percentage terms, you gained +178.919% from your option trade.

All of this is somewhat negligible — every outcome and every trade will be different — meaning you won’t always make 178.9% – or even anything at all depending on the case. But this is just one example of how crafting a trigger, or trade entry, can be performed, and how it works in practice. 

How We Exit Short-Term Option Trades — Roll, Roll, Roll

Now, here’s the last key ingredient of our trade plan – exit levels. Ideally, you don’t really want to hold on to a trade until expiration. In fact, the sooner you can lock-in profit on these short-dated options, the better. When crafting exit levels, we often apply the same thesis to our triggers — we use flat lines and historic price action to determine likely areas for a bounce. 

In the chart above, we’ve added two levels to consider exiting the example trade we mapped out. These two levels have acted as resistance and support for the SPY a number of times. If we were going to map out a third lower level, we might have chosen $403.74 – the location of a double bottom that occurred between April 26th and May 4th. 

The goal at these “exit” levels isn’t necessarily to exit the entire trade – it’s to roll in order to lock in some profit. For example, that first exit level was located at about $417.00. On Wednesday afternoon, when price began to touch that level, you might have considered rolling your $421 SPY option (which was likely worth around $4.80 at the time) to a now at-the-money $417 put option, at the same Friday expiration, which would have cost you roughly $2.50 per contract. This means you would lock in $2.30 in cash, and leave $2.50 on the table to continue the trade. You can theoretically carry out this roll maneuver as many times as you like throughout the course of a trade, consistently selling your more expensive option for a less expensive option every time you get the opportunity.

This is one key way that we manage risk at Market Rebellion. When you roll to lock in profit, your ultimate goal is to reach a point where the only capital at risk is “house money” – money you made throughout the course of the trade. This means you can carry on your trade with comfort, knowing that you’ve reached a point where you can’t lose any of the initial money you risked to make the trade. If momentum continues in your favor, that’s great. If momentum goes against you, at least you prevent a set back in your portfolio. 

In closing, there are plenty of ways you can trade weekly expiration options – but this is our way. We use at-the-money options with high gamma to make sure we get fast-moving options. We use technical analysis to set entries and exits, charting “flat lines” across key levels of support and resistance. And we roll often to lock in chunks of profit whenever possible, in an effort to reduce the total capital at risk.

Now it’s time to execute on what you’ve learned. Try a month of Rebel Pit Essential today to get breakdown and breakout trades every week, complete with triggers, exits, and specific contracts.

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