By Louis J. Horkan, Jr. Day Trading Expert
Option trading has always been a bit of an anomaly to many day traders. While the leverage inherent in trading options is appealing to traders, their short-term approach has never really aligned well with the relatively long-term horizons associated with option contracts - option expirations have always ranged from months to years in the future.
Moreover, weekly options avail many traders of highly-lucrative opportunities not previously available.
A New Security?
While largely unknown to the general public and still new to most traders, weekly options (also known as Weeklys) have actually been around for some time. Weekly options were first introduced by the Chicago Board Options Exchange back in October 2005 on four cash-settled index options. The CBOE expanded the list to include a handful of individual stocks, exchange-traded funds (ETFs) and exchange-traded notes (ETNs) in June 2010.
Weeklys are now offered on more than 150 of the most well-known stocks in the U.S. 30 ETFs/ETNs and a handful of the broad-market U.S. indices, with expectations the list will continue to expand considerably over time.
How Do They Work?
As implied in the name, Weeklys have a lifespan of one week or seven trading days. New contracts are created each Thursday and expire the following Friday for equities and ETFs/ETNs, while weekly index options close out trading either Thursday or Friday, depending on the index.
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Weekly options are not created for new listing in the week prior to when standard (monthly) contracts expire on the third Friday of each month.
Just as with standard option contracts, Weeklys listed for equities and ETFs/ETNs are American exercise (allowing them to be closed at any time prior to expiration) and physically settled. Weekly index options can be either European
or American exercise and are cash-settled. The trading symbols for both standard and weekly options are identical other than the expiration date.
Aside from the aforementioned issue of leverage, a key benefit to traders is the fact that weekly options offer 52 expiration periods each year, significantly increasing their ability to take advantage of expiration opportunities. This is especially true for traders seeking to take advantage of the increased volatility associated with expiration and for option sellers attempting to capitalize on the acceleration of time decay inherent during the final week of expiration.
Weekly options are cheaper to purchase than standard options due to the "time-value" priced into the longer-term instrument.
Weeklys provide traders the ability to engage in strategies targeted to or around specific events, such as earnings, product announcements, key economic reports, etc. Traders can select an option that expires on or before the event, reducing their risk in the trade.
Traders can engage in lucrative option strategies (e.g. calendar and diagonal spreads ) by pairing weekly and monthly options.
While the short time-frame of Weeklys provides a number of benefits, it can also work against traders. An option buyer will pay a lower price for a weekly option compared to a purchaser of a standard option, but they enter the trade with a very limited window of opportunity, during which time the underlying instrument must make a move in the intended direction - time is of the essence and working against them from the very moment they enter the trade. The same holds true for trades that run into trouble and move against a trader - there's simply no time to attempt to repair the trade by adjusting strikes and little opportunity for recovery in the price of the underlying instrument.