I see it all the time online:
“I sell options 30 days out.”
“I only sell monthly options.”
“I take advantage of theta-decay, so I sell puts around 45 days out.”
Am I the only one who believes that weekly options are MUCH better for option sellers than longer-term (multi-week/monthly) options? Sometimes it feels that way.
I’ve been selling weekly options for almost 2 years now because to me, it’s the most profitable strategy. What do I mean by profitable? I mean it’s the strategy that is most likely to result in the highest account balance in the shortest amount of time. The time factor is an important one that people often overlook. We don’t just want a good return on investment (ROI), we want a good ROI fast.
Monthly option sellers have often been trained by phrases like “theta-decay” and the whole TastyTrade mantra of selling options 30-60 DTE. They often swear by this and scoff at weeklies. So I decided to run a little simulation to test weeklies vs. monthlies. My suspicion is that weeklies are better than monthlies because your account balance compounds faster. This is simply due to the fact that you get paid every week vs. every month with monthlies. And that means you can reinvest your profits faster. How much will this affect the results of the simulation?
I decided to simulate 2 accounts, each starting with $10,000. The weekly options seller has a weekly ROI of 2.5% (this is pretty close to my median weekly ROI). The monthly options seller has a monthly ROI of 10% (for fairness, I set the monthly account to compound every 4 weeks, even though some months are longer than 4 weeks).
I then let the simulation run. At any instant in time, we can see how the weekly account balance is growing compared to the monthly account balance. After 1 year, this is how that looks:
Before you object to the crazy account balance growth after just 1 year, remember that there are no “losses” in this experiment, just wins. That’s because we’re simply trying to gauge whether weeklies are better than monthlies assuming both are winning 100% of the time. Furthermore, we are reinvesting ALL profits as often as we can and assuming the entire account balance can be reinvested every time, which is not usually the case. But again, for this experiment, we are comparing optimal weeklies vs. optimal monthlies.
The plot above shows what I expected: weeklies edge out monthlies. What’s hard to see is that the advantage actually grows with time. The longer the simulation runs, the more weeklies return compared to monthlies. This can be seen in the plot below:
This shows that after 2 years, the weekly account is ~10% larger than the monthly account. After 5 years, it’s ~25%, and after 10 years, it’s ~60%. That really adds up over time.
[By the way, if I repeat the above experiment but with even longer-term options like 6 weeks until expiration, then weeklies are even more beneficial.]
“But wait!”, monthly lovers will say. “You’re forgetting that monthlies require much less management than weeklies.” Less management means less time/effort. That might make monthlies more appealing, right?
I disagree. I would argue that monthlies actually require more management than weeklies. With monthlies, I often see people bragging about closing their contracts early for 50% of the max premium. Nice! But that required management and time on your part. With weeklies, you can put in the orders over the weekend, they execute on Monday at market open, and then you can let them ride until expiration on Friday. No management, no watching, no adjusting, no effort, no time involved during the week.
Other detractors might say, “Well, you’re selling puts closer to the money (closer to the underlying stock’s price), so you’re going to lose more often.” I disagree with that too. With monthlies, you’re selling further from the money, yes, but you’re also giving the underlying stock more time to move against you. That in turn might require management and time on your part, not to mention losses. I’d surmise that weeklies and monthlies don’t inherently differ too much on win/loss rate. That means that, again, the better choice will be the one that grows your account faster.
Now, all that being said…I’m not saying don’t ever sell multi-week/monthly options. I myself sometimes choose to sell longer-term calls, to give the underlying stock more time for its price to recover. If you have a system for selling monthlies and it works for you, great! Keep at it. Just know that when it comes to compound interest and the potential for account growth, weeklies are inherently better.