Weekly vs Monthly Covered Calls: Which is Better?

Jesse Anderson

Published on December 27, 2021

Many investors today utilize the selling of covered call options to generate income on their investment accounts. With any exchanged-traded option, one of the key components is the expiration date. The two most prominent types of covered call options expire on a weekly and monthly basis. This, of course, begs the question of what type of option should an investor sell generate the maximum return on his or her account(s). Let’s take a few moments to discuss weekly vs monthly covered calls and which one might be preferable for you.

Selling Weekly vs Monthly Covered Calls for Income: 

What Is an Option Expiration?

When an option contract is entered into between a buyer and seller, it is not for an indefinite term. The contract will have a predetermined date set at the time of the sale transaction, by which the buyer of the option must decide whether or not to exercise their right to buy (or sell) shares of the underlying stock. This is the expiration date that we refer to.   You can find the available expiration dates for a stock on its option chain.  

So when do these expiration dates occur? A little bit of history to explain. The trading of options goes back hundreds of years, and for the vast majority of that time, options were traded over-the-counter. This means that options were traded directly between the buyer and seller, without the involvement of a marketplace. This resulted in options having inconsistent purchase prices and expiration dates; these were simply what the buyer and seller agreed upon at the time of the transaction. Furthermore, over-the-counter options were also very illiquid; because there was no marketplace to buy and sell options.  This created a problem if the interested parties wanted to divest themselves of their holdings.

With these problems in mind, the Chicago Board of Exchange (CBOE)  was established in 1968 and began trading as a marketplace in 1973. The CBOE set standard option contracts for buyers and sellers; most notably, the expirations of option contracts were made uniform with monthly (or standard) expiration dates. Monthly option contracts expire on the third Friday of each month.

In the years after the opening of the CBOE, options trading grew exponentially in popularity among investors. This increase particularly occurred during the 1990s, when online brokerages first came into existence, allowing many average investors the ability to easily trade covered calls. In 2005, the CBOE introduced weekly options as a way to increase option trading even more.

Weekly options are functionally similar to monthly ones, but give investors a lot more choices for the end of their contracts.  Not all stocks will have weekly options.  Although the list is growing, they are typically only issued for the most popular stocks.  Not all stocks have options, but if it is an optionable stock, it will have the standard monthly expiration on the third Friday of each month.  

Monthly and weekly options are the most common expiration periods in exchange-listed option investing. However, there are other alternatives as well. Quarterly options, for example, have expiration dates for the last business day of the financial quarter. Other non-standard expiration dates include end-of-month (EOM), which expire on the last business day of a calendar month, as well as options that may expire on Monday or Wednesday weekly, in addition to Fridays. All these expirations are relatively innovations;  Because they often lack the liquidity of the more popular expirations, we don’t recommend that investors utilize them at this particular point in time.

Which Expiration Date is Best?

When discussing weekly vs. monthly covered calls, and what is the difference between weekly and monthly options, there are several different factors to consider: 

Time Decay

The price that covered call options sell for in the market is determined by a few different variables. One of the most important of these is the time value of the covered call. Generally, the longer the time frame before expiration, the greater the option premium that will be received by covered call traders. This is because the longer expiration period gives a greater opportunity for the underlying stock to appreciate in value above the strike price that the covered call has been sold.

Monthly options, taken individually, will therefore tend to generate more premium than weekly options, due to the fact that they have longer time horizons before they expire.  An important note about time decay, it starts to decline rapidly as expiration approaches.  For this reason, covered call traders rarely sell weekly vs monthly covered calls with expirations greater than 1 month.  

Investment Objectives and Time Frame

Covered calls are best used as a short-term strategy to boost portfolio income.  Depending on how short term that time will influence your decision between weekly vs monthly options.  Other considerations include important dates influencing stock prices.  For example, an earnings call could move a stock’s price higher or lower.  As a covered call trader, you may utilize an expiration prior to the earnings call to avoid volatility.  Ex-dividend dates are another key consideration for covered call investors. 

When selling a covered call, you are obligated to sell your shares if the option buyer chooses to exercise the option.  When you sell the stock and for how much (strike price), are key objectives to decide before selling weekly covered calls for income.  

Trading Frequency

Monthly covered calls have appealed to many investors due to the fact that they only need to be traded once per month. For investors that do not have a lot of time to devote to actively trading their accounts, this can be a big help.

Other traders may be seeking out a more involved trading strategy. They would potentially be drawn to weekly covered calls, which offer far more trading opportunities throughout the year (potential of 52 trades, as opposed to just 12 with monthly options). 

Liquidity

Liquidity in an investment portfolio not only refers to the ease with which the underlying portfolio can be converted to cash but also with which holdings in an account can be traded in a market. Prominent stocks trade both monthly and weekly covered calls, but there can be other variables that come into play as well.

These include open interest (how many option contracts are currently available in the market), volume (the number of contracts that are traded over a day) and bid/ask spreads (the spread between the bid price for a covered call and the ask price for the same contract).

An investor will have to weigh these factors when determining what options to sell. A weekly option may appeal to the investor, but if the open interest or volume is low, it becomes very inefficient to trade.  Large bid/ask spreads make opening and closing a trade at an efficient price more difficult.  

How Do We Best Trade Covered Calls?

Regardless of whether or not you choose to trade monthly or weekly covered calls, one of the best ways to earn a consistent income is to devise a defined investment strategy and practice it without interruption. This can take the form of rolling covered calls, dollar-cost averaging, or any other investment strategy that you find appealing.

It is equally important to keep in mind that you want to stick with your investment strategy even when it is tempting not to. The worst mistakes usually occur when you depart from a set strategy to chase gains through riskier trades. 

You will also want to take advantage of any resources that are offered to you to find the best stocks to do covered calls with. optionDash includes many covered call investment tools and data points to help you practice your chosen method successfully. Our free covered call screener can help you to locate the best weekly covered call options or monthly calls.  It also includes a cash-secured put screener for those inclined to sell puts to generate income.