Download the Schwab app from iTunes®Get the AppClose

  • Find a branch
To expand the menu panel use the down arrow key. Use Tab to navigate through submenu items.

Screening for Weekly Buy/Write Candidates

Screening for Weekly Buy/Write Candidates

Key Points
  • A buy/write is when you create a covered call (long stock/short call) position in a single order.

  • A weekly buy/write has a timeframe of one to nine days so the outlook for a particular security takes on a greater significance than with a traditional buy/write.

  • We'll discuss a four-step process to help find good weekly buy/ write candidates.

A buy/write—when you create a covered call (long stock/short call) position in a single order—is a popular, relatively conservative options strategy. Previously, I've discussed a four-step process for help in finding quality buy/write candidates with traditional options. Now, we'll explore how to use a very similar process with weekly options.

Before we get started, there are a couple of important items to mention. Due to the short duration of a weekly option:

  • Your goal should always be to get assigned at expiration. In the case of a short call, this means you expect the stock to be above the strike price at expiration.
  • The outlook for the particular security you're trading takes on greater significance.
  • Although market volatility is always a factor, the premium—or the income—built into the specific weekly option you are considering is much more important when the duration of your trade is shorter.

Now, let's turn to the four-step process to help identify good weekly buy/write candidates.

Step 1: Assess the market

When you establish a weekly buy/write (with a timeframe of one to nine days), the overall market conditions may be less important than when you establish a traditional buy/write (with a timeframe of three to eight weeks). However, the ideal market is still one that is neutral to slightly bullish.

To find out why, let's take a look at the main factors you should consider—volatility, strike price, profit goal and downside protection—in various market conditions.

Moderately bearish market

  • Volatility: During a moderately bearish market, volatility is usually a little higher from a historical perspective. As a result, when volatility is relatively high, options prices tend to be a little more expensive.
  • Strike price: You may be able to establish a buy/write using weeklys that are already slightly in the money. This should result in a larger option premium received when your buy/write executes. 
  • Profit goal: If you are assigned on an in-the-money buy/write, you will incur a loss on the stock leg of the strategy. However, the profit on the option leg should be enough to make the strategy profitable as a whole. This is an important point to keep in mind. Before you enter the trade, make sure the option has enough time value to cover both the commission costs of entering the trade and being assigned, while still leaving a small profit.
  • Downside protection: During a bearish market, downside protection is an important consideration, even for short-term trades. Because the option is already slightly in-the-money, it provides more of a downside hedge than an at-the-money or out-of-the-money option. Thus the stock has to drop sharply before you miss getting assigned.

Flat market

  • Volatility: During a relatively flat market, volatility is usually about average from a historical perspective. As a result, when volatility is average, options prices should also be about average.
  • Strike price: You may want to consider establishing a buy/write using weeklys that are about at the money. This should result in an option premium that is slightly lower than if you used an in-the-money option. 
  • Profit goal: As I mentioned before, when entering a buy/write of such short duration, your goal should always be to get assigned at expiration. In the case of a flat market, if you are assigned, you may incur either a small loss or a small gain on the stock leg of the strategy, but the profit on the option leg should be enough to make the strategy profitable as a whole.
  • Downside protection: Even though at-the-money options provide less downside protection, it is still very important to be sure the option has enough time value to cover the commission costs of both entering the trade and being assigned, while still leaving enough for a small profit. Since at-the-money options usually carry the largest time values, this should be a little easier than when you use in-the-money options. Keep in mind, when the option strike price is very close to the starting price of the stock, the stock will not have to drop very much before you miss getting assigned.

Bullish market

  • Volatility: During a bullish market, volatility is usually below average from a historical perspective, and when volatility is below average, options prices will generally be lower overall.
  • Strike price: Most importantly, in a bullish market, you want to allow room for the price of your stock to increase, so you may want to consider establishing a buy/write using weeklys that are out of the money. This will usually result in an option premium that is much lower than if you had used in-the-money or at-the-money options. 
  • Profit goal: Since your goal is to get assigned at expiration, the stock will have to increase in price in order for that to occur. If you are assigned, you will have a gain on the stock leg of the strategy and a small gain on the option leg, making the overall strategy profitable.
  • Downside protection: Even though out-of-the-money options provide almost no downside protection, this is usually not a big consideration when you are bullish on the market and the stock. That said, if you are assigned, it is still important to be sure the combined profit from the stock and the option will be enough to cover the commission costs of both entering the trade and being assigned.

Take a look at the table below. It shows a hypothetical example of how different strike prices and volatilities could affect weekly buy/writes with four days until expiration, under various market conditions.

Weekly Buy/Writes during Bullish, Flat and Bearish Markets

Market

Implied Volatility

Stock Price

Call Strike Price

Sell

Call Price

B/W

Net Price

Debit/ Credit

Max Gain

Max Gain

Hedge %

Max Loss

B/E
Price

Bullish

34%

47.10

48

.32

-46.78

DR

$122

2.6%

0.7%

($4,678)

46.78

Flat

37%

47.10

47

.78

-46.32

DR

$68

1.4%

1.7%

($4,632)

46.32

Bearish

40%

47.10

46

1.45

-45.65

DR

$35

0.7%

3.1%

($4,565)

45.65

Source: Schwab Center for Financial Research.

When the stock is trading at $47.10 during a bullish market, a proposed strike price for out-of-the-money calls might be $48. With the implied volatility at 34%, this trade has a maximum profit of 2.6% but only provides downside protection of 0.7%. If assigned, the stock will be sold at $48 (a gain of $0.90 per share), plus the option premium of $0.32 would be retained for a net profit of $122 per 100 shares. This strategy has only $0.32 of downside hedge.

When the stock is trading at $47.10 during a flat market, a proposed strike price for at-the-money calls might be $47. With the implied volatility at 37%, this trade has a maximum profit of 1.4% and provides downside protection of 1.7%. If assigned, the stock will be sold at $47 (a loss of $0.10 per share), but the option premium of $0.78 would be retained for a net profit of $68 per 100 shares. This strategy has $0.68 of downside hedge.

When the stock is trading at $47.10 during a slightly bearish market, a proposed strike price for in-the-money calls might be $46. With the implied volatility at 40%, this trade has a maximum profit of 0.7% but provides downside protection of 3.1%. If assigned, the stock will be sold at $46 (a loss of $1.10 per share), but the option premium of $1.45 would be retained for a net profit of $35 per 100 shares. This strategy has $1.45 of downside hedge.

Commissions: An important consideration

As mentioned above, because a weekly buy/write is a short-duration trade, the potential profit is much smaller than for longer-term buy/writes. As a result, commissions are a big consideration. The commission cost to enter a 100 share buy/write at Schwab is typically $4.95 for the stock leg and $0.65 per contract for the option leg. Then if you get assigned on the stock leg you'll incur another $4.95 commission. So the total round-trip commission costs are $10.55. That means any weekly buy/write that has a maximum potential profit of less than $20 should either be entered for more than 100 shares or not at all.

Step 2: Look for candidates

Now that know how to choose your strike price, the next step in helping identify good weekly buy/write candidates is to create a screener to help find potential stocks or exchange-traded funds (ETFs). A good way to do this is to use the Customizable Options Screener available on schwab.com.

Underlying price

Since each weekly buy/write involves the purchase of at least 100 shares of stock, the first setting in the screener is to define the stock price range in which you are willing to trade. Just like with traditional buy/writes, it doesn't make sense to screen for very high or very low priced stocks if you wouldn't normally buy stocks in those price ranges, so be sure to set a minimum and maximum price in the screener.

Average volume

In my opinion, you should avoid low-volume stocks because illiquid stocks are likely to have illiquid options. At this time, weeklys are only available on high volume stocks and ETFs, but I believe you should consider setting the minimum average daily volume to at least 500,000 shares in case this changes in the future.

Implied volatility

Options on stocks whose implied volatility is too high will be excessively risky and generally not worth the modest profits that might be generated from a weekly buy/write strategy. Consider setting this parameter to a maximum implied volatility of 75%. You can adjust it higher if you have a high tolerance for risk.

Static rate of return

One of the two most important measures of the merit of any buy/write is how much profit you'll earn if the stock remains unchanged. Since your timeframe is very short, here are some guidelines to consider for weekly buy/writes:

Buy/Writes Expiring in 1-5 Days
In-the-money 0.5-1.0% (minimum)
At-the-money 0.8-2.0% (minimum)
Out-of-the-money 0.6-1.5% (minimum)

 

Buy/Writes Expiring in 5-9 Days
In-the-money 0.8-1.2% (minimum)
At-the-money 1.2-2.4% (minimum)
Out-of-the-money 1.0-1.8% (minimum)

 

Remember, for at-the-money or out-of-the-money buy/writes, the static rate of return is also the amount of downside hedge you'll have if the stock moves against you. For in-the-money buy/writes, your downside hedge will exceed the static rate of the return.

Assigned rate of return

The other key measure of the merit of any buy/write is how much profit you'll earn if you get assigned. Because getting assigned is your primary objective with a weekly buy/write, this is the most important consideration. Below are some guidelines to consider in setting this parameter: 

Buy/Writes Expiring in 1-5 Days
In-the-money 0.5-1.0% (minimum)
At-the-money 0.8-2.0% (minimum)
Out-of-the-money 0.6-1.5% (minimum)

 

Buy/Writes Expiring in 5-9 Days
In-the-money 0.8-1.2% (minimum)
At-the-money 1.2-2.4% (minimum)
Out-of-the-money 1.0-1.8% (minimum)

 

Assigned rate of return is also the maximum profit you can earn on a buy/write, since the maximum profit is earned when you are assigned.

Once you have created an Options Screener that has the settings you want (as in the example below), be sure to save it for future use. 

Create an Option Screen

Create an Option Screen
Create an Option Screen

Source: schwab.com.

Step 3: Check the Ratings

When you get your output list from the screener using the process outlined above, there's additional research you can consider before you enter any orders: the Schwab Equity Rating® or other independent, third-party research ratings. Even though the timeframe for a weekly buy/write is very short, I suggest you trade only those stocks that have a Schwab Equity Rating of "A" or "B" or stocks that are highly rated by third party research, such as those with a Market Edge Second Opinion Weekly Rating of "Long" with a score of "0" or "-1". The Schwab Equity Ratings are updated weekly and are available by clicking on the stock symbol from the output list of your screener. Along with reviewing the Rating, I suggest that you read the accompanying Schwab Equity Rating Report, which provides detailed information and can help you understand the factors that determine the Rating.

How to Check Stock Ratings

How to Check Stock Ratings

Source: schwab.com

Reference to any securities mentioned above provided as an example for illustrative purposes only.

Step 4: Order entry

Just like traditional buy/writes, weekly buy/writes have both a bid and an ask price, and you often don't have to pay the market asking price for execution.

Even though weekly options are not yet as popular as regular options, there should be enough liquidity in most names to allow you to enter a limit order between the bid and ask price and still have a reasonable chance of getting filled.

To help maximize your chances of getting an execution at a favorable price, consider entering the order slightly on the high side of the midpoint. Since StreetSmart Edge displays the midpoint for you, this is easy to do. In the example below, the spread is fairly narrow but this order should probably be executed at $22.22.

Entering Your Order

Entering Your Order

Source: StreetSmart Edge®.

Remember, your goal is to be assigned. And, because your timeframe is very short, it's unlikely (although possible) that you would want to close out the trade early since that would involve additional commission costs (for closing the option leg). Therefore, only consider a weekly buy/write on a stock you would be comfortable holding for up to nine days, regardless of what happens. If you are trading around earnings reports or x-dividend dates, be especially careful.

If you are a traditional buy/write trader like I have been for many years, I hope you find these weekly options as appealing as I have. Good luck and good trading. For more information please contact a Schwab Trading Specialist at 800-435-9050.

Next Steps

Schwab clients: Contact a Trading Specialist at 800-435-9050 for questions or log in to the Trading Services Learning Center.
Not yet a client? Learn more about Schwab Trading Services. 

 

Reducing Your Exposure with Covered Calls
Reducing Your Exposure with Covered Calls
5 Myths of Volatility Options
5 Myths of Volatility Options

Schwab has tools to help you mentally prepare for trading

Learn more >

Talk trading with a Schwab specialist anytime.
 
Call 888-245-6864
M-F, 8:30am - 9:00pm EST

Get 500 Commission-Free Online Equity and Options Trades for Two Years

Learn More >

(0517-YYFX)

Thumbs up / down votes are submitted voluntarily by readers and are not meant to suggest the future performance or suitability of any account type, product or service for any particular reader and may not be representative of the experience of other readers. When displayed, thumbs up / down vote counts represent whether people found the content helpful or not helpful and are not intended as a testimonial. Any written feedback or comments collected on this page will not be published. Charles Schwab & Co., Inc. may in its sole discretion re-set the vote count to zero, remove votes appearing to be generated by robots or scripts, or remove the modules used to collect feedback and votes.