Short-term weekly option contracts are gaining traction among investors—even though their volatility can make it easier to lose money.
Unlike standard option contracts that expire in a month or more, weekly options can be a cheaper way to make bets around near-term events, such as corporate earnings or a government report. Investors can also use them as a way to generate income or offset the costs of holding longer-term options.
Weekly options are also a cheaper way to get exposure to expensive stocks, says Steve Quirk, head of the active-trader group at TD Ameritrade. Because of their short duration, they cost significantly less than standard options.
Say you own shares of Google Inc., which are trading at about $490. For about $11, you could buy a "put" option, which allows you to sell the stock if the price falls to below $480 at any point in the next month. But for about $2, you could buy a put that allows you to sell the stock if the price falls to below $480 in the next week.
If the stock went up during the week, that weekly option would expire worthless and you would be out the premium. But if the stock fell below the option's strike price, the investor could make a big profit.
But three easily followed indicators can help you make sense of today's chaotic, macro-driven trading environment—and maybe even get out in front of the next big move.
How to spot the next big move before it happens? According to some strategists, there is a simple way to gauge the future: Just look at the Institute for Supply Management's Manufacturing Index.
The ISM and the S&P 500 tend to move together. Their so-called correlation is currently 0.911, the highest since touching 0.95 in November 2009. Over the long term, the correlation between the ISM and the year-over-year change in the S&P has jumped from 0.3 in the 1970s to 0.8 now. (A reading of 1 means they always travel in lockstep; a reading of -1 means they always move in opposite directions.)