Simple options trading strategy for weekly income

​You can earn in the market not only from asset growth. There are strategies that allow you to generate regular income — almost like a salary. One of them is trading option spreads with weekly results.

Today, I’m going to show you a simple options trading strategy that can be used to generate weekly income. Of course, it’s always nice to just invest in a financial asset and then watch it substantially increase in value over the long term. Anyone who bought a few ounces of gold about 20 years ago – for less than $500 an ounce – undoubtedly has a nice, big smile on their face. But in addition to long-term investing, it’s also nice to have a trading strategy that can put some quick money in your pocket on a weekly basis – kind of like getting a regular paycheck from your job as a trader.

This options trading strategy is a fairly simple one, and it can be used to trade an asset whether it’s in an uptrend or a downtrend (or even pretty much no trend at all). The strategy has clear entry rules and flexible exit rules that you can tailor to your own personal risk tolerance or desire for gains. However, like all trading strategies, this approach involves risk, and losses may occur depending on market conditions and execution. 

The weekly options trading strategy – the basics

This trading strategy involves trading vertical option spreads, where you’re selling one option while simultaneously buying another option with a different strike price. The spreads are credit spreads – which means money is credited to your account when you open the option position – because the option that you sell is always going to be more expensive than the option you buy.

The initial credit that you receive is your maximum potential profit on the trade.

The maximum potential loss is determined by the difference between the two option strike prices. For example, if you sell a put option on a stock with a strike price of $67 and buy a put option with a strike price of $65, then your maximum potential loss is $200 (100 shares of stock x $2 per share).

- If you’re trading an asset that’s in an uptrend, where you expect the price to keep rising, then you’ll be doing a put credit spread – selling one put option and simultaneously buying a put option with a lower strike price.

- If you’re trading an asset that’s in a downtrend, where you expect the asset to keep decreasing in price, then you’ll do a call credit spread – selling a call option and buying a call with a higher strike price.

- Uptrend or downtrend is determined by the 50-day moving average. If an asset has been trading consistently above its 50-day MA, then it’s considered to be in an uptrend. If trading has been below the 50-day average, that’s a downtrend.

Note: To keep things simple, I’m only going to look at trading an uptrending market. Trading a downtrending market just involves reversing everything and trading call options instead of put options. 

The trading strategy

The key determining trigger for this options trading strategy is the 10-day moving average.

Assuming we’re trading an asset that’s in an uptrend, the trade works as follows:

- The situation to look for is where the asset has traded substantially above its 10-day moving average, but has now retraced back down to near that 10-day moving average (possibly even a bit below it), and then records a bullish candlestick (such as a hammer up or bullish engulfing candle formation) on the hourly chart, with a closing price above the 10-day MA.

With those situational parameters met, you initiate the trade by opening a put credit spread. Sell a put option with a strike price around the current 10-day moving average price, and buy a put option with a strike price that’s one or two strike prices lower than the strike price of the option you’re selling. (Again, an example would be selling a put option with a strike price of 67 while buying a put with a strike price of 65.)

What Options to Trade – The options to consider trading are options that expire on either Friday of the current week or Friday of the next week. So, if it’s Tuesday, the 7th of April, you’d be looking at doing the spread with options that expire either on Friday, the 10th, or Friday, the 17th.

You may want to go with the further out expiration date if the option spread for that date is substantially higher – for example, if you can trade the same strike prices at the longer expiration date and collect a credit of $105 versus collecting a credit of $65 for the current week expiration, that represents a substantially higher potential profit and substantially lower potential loss.

It can sometimes be advantageous to initiate the trade on a Friday, trading options that expire the following Friday. If there’s no significant price movement in the underlying asset over the weekend, then you can see increased profit in the trade on Monday, simply due to the fact that the options are now three days closer to expiration.

Profit and loss with an option credit spread

Since the credit/premium you receive when you open the option credit spread represents the maximum potential profit, you always want that number to be as high as possible, as close to the maximum difference between the option strike prices. Staying with our $67 and $65 strike prices example, the maximum credit that could be collected would be $200, as previously noted. That number is also always going to be the maximum potential loss.

It’s recommended to try to get a credit spread premium of at least $70-$80 – or one-third of the option spread value – and it’s preferable to get a credit equal to one-half to two-thirds of the spread. The higher credit premium you collect when you open the trade, the higher your potential profit.

Profit targets

Profit targets should be determined by your personal risk tolerance and trading profit goals. Suggested profit targets are 30%, 50%, 75%, or 100%. For example, with a 50% profit target, if you collected a credit of $70 when you opened the trade, you would exit when the spread price dropped to $35, as it would cost you $35 of the $70 you originally received to close out the trade – leaving you with a profit of $35.

(Note: You are essentially “selling” the spread when you open the trade, and then “buying” it back when you close the trade, so, to be profitable, you want to see the price of the option spread when you look to close the trade lower than the price was when you opened the trade.)

Minimizing loss

The following suggestions are offered to help minimize losses:

- Exit the trade if the underlying asset price falls back below the 10-day moving average, or below the low of the week

-  Exit if the asset price falls below the strike price of the option you sold

-  Exit if a pre-selected loss level is reached

One risk-minimization technique that can be used with this strategy is selecting option strike prices that are significantly below the 10-day moving average price. For example, if the 10-day moving average price is $100, and the low of the pullback has been $99, you could potentially lower your risk by going with option strike prices of, say, $96 and $94 rather than strike prices of $100 and $98. However, while that may lower the chance of suffering a loss, or limit the loss, it will also significantly limit your potential profit, because using lower strike prices will mean that you receive a significantly lower credit amount when you initiate the trade. 

The weekly options trading strategy – an example

I think the easiest way to help you understand this trading strategy is simply to look at it in action. So, let’s look at an example.

The chart of Western Digital Corporation (NASDAQ: WDC) below shows the stock’s price having crossed back above the 10-day moving average (the thick red line on the chart) just a few days ago. At that time, the 10-day moving average price was around $282. So, if we had looked to open a put credit spread for options expiring Friday, April 17th, we might have gone with the $282.50/$280.00 spread. The price on that spread is currently $48 - that $48 represents the price we could close the trade at now. However, that’s with the options several days closer to expiration, and with both the stock price and the 10-day MA having moved significantly higher.

Daily chart of Western Digital Corporation (WDC)

Chart image courtesy of TradingView

 It’s, of course, a bit difficult to extrapolate with total accuracy, but we can get some idea of the price we might have been able to open the trade at by looking at the spread strike prices around the current level of the 10-day moving average. The $292.50/$290.00 put spread for the 17th is currently going for about $100 – and that’s with the stock trading about the same distance above the 10-day MA as it was last Thursday. From that, we can estimate that we might have been able to sell the $282.50/$280.00 spread back then for around $90-$100. With that spread currently at $48, we could go close out the trade with approximately a 50% profit (i.e., $95-$48=$47) – or opt to hold it for potentially higher gains.

So, there you have it – a fairly simple options trading strategy that has the potential to provide you with some weekly trading income. This strategy can be applied to trading options on any financial asset where options trading is offered, and can be utilized in bullish, bearish, or neutral market conditions.