Weekly vs. Monthly Covered Calls

  by Shelley Seagler

Covered calls are a great low-risk strategy to generate an income from an existing equity portfolio. By selling call options against an existing equity position, protect your downside some if the price of the stock declines. The strategy enables you to generate an income above and beyond equity dividends.

The two most common questions that arise when looking into covered calls are: Which option (duration) should I sell? And, should I use a strike price in-the-money or out-of-the-money?

In this article, we will answer the first question by taking a detailed look into the pros and cons of weekly versus monthly covered call options, as well as how to select the right option for your portfolio and investment objectives.

What’s the Difference?

The Chicago Board Options Exchange (CBOE) introduced monthly call and put options back in the 1970s. Using these options, investors can choose from 12 monthly expirations on the third Friday of each month. The CBOE began offering weekly options in 2005 that provide 52 weekly expirations each Friday.

Weekly options have become increasingly popular over the years. Between 2016 and 2017, the S&P 500 weekly options experienced average daily volume of more than 520,000 contracts, representing a 35 percent year-over-year increase. But, monthly options remain the most popular in terms of volume.

There are roughly 160 million call options and just 12 million of those are weekly options, according to CBOE data from October 30, 2018. In essence, that means there is roughly ten times more open interest in monthly call options compared to weekly call options.

What Are the Pros & Cons?

The decision between weekly and monthly call options is a little more nuanced than the popularity of each option. After all, options traders use different options for different reasons. Weekly and monthly options have different pros and cons to carefully consider before making a decision.

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Let’s take a look at four key considerations and how they impact covered call strategies.

Income Potential

Covered call strategies are focused on using short-term options to maximize time decay. In other words, you want to maximize the rate at which an option loses value since it increases the odds that you get to keep the premium. And shorter dated options have greater time decay than longer dated options.

You could sell one monthly covered call or four weekly covered calls over the same timeframe. Since weekly covered calls have a faster time decay, all other factors being equal, you could generate a little more income from weekly covered calls compared to monthly covered calls. More active investors may be drawn to them for this reason.

Transaction Costs

Everyone has to pay a commission and cover the bid/ask spread when selling a covered call. If you sell four weekly covered calls, you must pay four commissions and cover wider spreads than monthly covered calls. These dynamics make monthly covered calls cheaper to set up than weekly covered calls.

The impact of transaction costs varies depending on the trader, broker, order size, and other factors. If you pay low commissions and trade highly liquid options, the higher transaction costs for weekly covered calls could be nominal. If not, then you could face much higher transaction costs.

Protection & Liquidity

The premium received for monthly covered calls is always higher than the premium received for weekly covered calls since there’s more time value. If the underlying stock moves against you, there’s a greater safety cushion with monthly covered calls since the premium can offset more of the decline.

Monthly covered calls are also much more liquid, which is why the bid/ask spread is tighter. If you want to exit a position, you will pay less in slippage with monthly covered calls compared to weekly covered calls. There’s also a greater capacity to absorb larger orders than with weekly options.

Management Time

Weekly calls mean more trading, higher cost, and more time required to manage your portfolio. If you plan to consistently sell calls in your portfolio, it could mean the difference between trading 12 times a year (monthly) versus 52 times a year (weekly). We’ve found most investors don’t want to be tied to a computer all the time monitoring their account, so we designed our strategy around monthly calls and trading just one time per month.

Weekly Monthly Calls

a series of white doors on a wallpapered wall

What’s the Best Option?

Most investors are aware that the financial markets are full of trade-offs—there’s no free lunch! If you take on greater risk, you have the potential to earn more profit, but you also stand to lose more if the trade goes sideways.

Get the bonus content: 5 Things Investors Should Know About Covered Calls

Investors using covered call strategies to generate income from their retirement portfolios often stick to monthly covered calls because they have less risk. After all, most retirement investors are more concerned with capital preservation and income than taking on risk to increase returns.

On the other hand, active traders using covered calls to leverage their growth portfolios often use weekly covered calls as a way to maximize income. These traders are much more concerned about maximizing profit than limiting their risk, since they have longer time horizons.

It’s also important to note that both weekly and monthly covered call options have the risk of underlying stock being called away (or dropping significantly in price). It’s important to have a comprehensive strategy in place that screens for positions that work well with covered calls and will continue to generate income even if your stocks decline in price.

Getting Started

Snider Advisors specializes in using covered call option strategies to generate income for retirement. We have developed and fine-tuned The Snider Investment Method over several years to produce monthly income especially for retirement portfolios. It is great for retirees dependent on a regular paycheck from their portfolio.

The strategy is ideal for retirement investors that are looking for more income or a pivot away from bonds or other fixed-income investments that may be overly exposed to interest rates.

If you’re interested, please take our free introductory course to learn more about our investment strategy and how you can apply it to your own portfolio to start generating an income.

We also offer managed investment services for investors that want to take a hands-off approach. Contact us to learn more about our programs and how we can help you generate an income.

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