Welcome to the new world of weeklies
Chris McKhann | [email protected]
That's why we have created a special page dedicated to these short-term contracts.
optionMONSTER's Trading Weeklies page focuses exclusively on this "fastest money" in the option market. It allows you to look at the top volume contracts as well as sort by calls and puts, stocks, or exchange-traded funds and notes. The page provides pricing, volume, and open interest for the top Weekly contracts
Weekly options have taken off in the last year or so, and their growth continues to surge as exchanges add and alter the way they are traded. In September the International Securities Exchange added 50-cent strikes to the Weekly options, which previously had traded in dollar-wide spreads.
And the Chicago Board Options Exchange is now listing up to five consecutive expirations for Weekly options. This is limited to a handful of heavily traded names so far--including the SPX, SPY, IWM, EEM, QQQ, GLD, SLV, XLF, AAPL, and GOOG--but will likely be expanded.
If you haven't already discovered the advantages of Weekly options, they are manifold.
When you buy or sell options, you are in many respects buying or selling time. The more time you buy, the more you pay. But with most options bought around a specific time frame, such as earnings season, buying additional time can be a waste of money.
Many traders want to hold an option only through an event, but longer-term contracts carry higher premiums that force traders to put more capital at risk. Weekly options solve this problem because they have less excess time, which in turn lowers cost. That lets traders buy strikes that are closer to the money and have a better chance of making a profit.
The time premium of an option loses value as the contract moves toward expiration, and it does so with accelerating speed. So the last week of an option's life has the most time decay.
This can be great for option sellers who are looking to collect that theta. Most sellers have a sweet spot in the timing of their trades, and now they don't have to wait for it to roll around just once a month.
The best example of this comes in index and ETF options right now as the end of the year and the so-called fiscal cliff approach rapidly. If we go off the cliff, we won't really know about it until Jan. 1, and the regular monthly January expiration comes on Jan. 18. But with the Weekly options, you can buy the contracts that expire on Jan. 4, saving the cost of two extra weeks.
And dynamic traders or option sellers might take advantage of the time before the end of the year by selling Weekly contracts that expire before 2013 begins. More advanced traders may take advantage of both sides of this time frame with calendar or diagonal spreads.
The latter strategy--which entails buying and selling options at different expirations to take advantage of higher premiums in the longer-dated contracts--can offer some of the greatest opportunities in Weekly options.
We hope that you can take advantage of these and other strategies with the help of our new page!
(A version of this article appeared in optionMONSTER's Options Academy newsletter of Dec. 20.)