It’s Thursday, and a new set of weekly options will begin trading. Under an initiative that’s been expanding this year, investors can contracts on 28 stocks, indexes and exchange-trade funds that will have a lifespan of just seven trading sessions. That’s less than one-third the life of normal front-month options, giving fast-money traders a great shot at instant gratification.
Every Wednesday the CBOE announces which underliers will trade on a weekly basis. These include the usual high-volume suspects such as Apple, Ford Motor and Cisco Systems, which each trade more than 70,000 contracts in an average session. But the list includes some much-less frequently traded names such as the Direxion Daily Financial Bull 3x (FAS) and the Direxion Daily Financial Bear 3x (FAZ), typically trade fewer than 20,000 times a day. FAS and FAZ move triple the broader financial index, either directly or inversely, as their names suggest.
Given their shorter life spans, weekly options trade a steep discount to standard front-month calls or puts with several weeks until expiration. That means investors can achieve much more bang for their buck if their timing is correct.
Consider the FAZ, already a highly leveraged product in its own right. If an investor had purchased the fund itself the morning of Aug. 19, he or she would have paid $15.13 and seen it peak at $17.75 yesterday – representing a 17 percent profit. If he or she had purchased standard September 16 calls over the same span they would have paid $1 and seen them reach a maximum value of $2.52, a profit of 152 percent.
If they were really impatient, they could have purchased the weekly 16 calls expiring Aug. 27 for $0.44. Those contracts would rocket all the way to $1.80 yesterday, 309 percent above their entry price.
Don’t forget that FAZ is already designed to move three times the financial sector, but in the opposite direction. If we had simply shorted the SPDR Select Sector Financial ETF (XLE) over the same period, we would have earned less than 6 percent.
In other words, there’s leverage (FAZ). There’s leverage on leverage (front-month options). And there’s even greater leverage (weekly options).
Of course, nothing is free. In return for that greater performance, you have much faster time decay. If the underlier doesn’t move in your favor, your premium will decay in a hurry.
These instruments have many potential applications, and they are quickly growing in popularity. We’ll explore them, and potential strategies, each Thursday that a new roster of underliers is announced.
(Chart courtesy of tradeMONSTER)