Weekly Options – Overview
History of Options
We first heard of options in the year 1973. The CBOE or Chicago Board Options Exchange is the one who established the standard call options. On 1977, four years after the standard call options were introduce, the put option was launched. The put options became very popular. Their popularity was manifested in the increase of trading volume which actually increases at a compound annual rate of growth over 25% between the years 1973 and 2009. Basing from this big increase, it only shows that investors really understands the concept of options. Another conclusion that we can get out of this increase will be that investors are using them comfortably and they are using them with various strategies.
The Birth of Weekly Options
In 2005, a new class of option was introduced by CBOE. Thirty two years after the first introduction of call options weekly options were introduced. Weekly options are commonly called “weeklys.” This new class of option behaves very much like monthly options in several ways. However, there are also differences that you will be able to determine when you compare the two of them and the most pronounce difference that they have is the fact that weeklys is only capable of existing for eight days. The weekly options are introduced every Thursday and eight days later, Friday of the following week, they expire. With monthly options, investors will be able to enjoy 12 monthly expirations which are on the third Friday of each month. But with weeklys, investors can now enjoy 52 expirations for the entire year.
Strategies for Weekly Options
Options can be implemented with various strategies. There are various strategies that you can actually choose from. So, what are the strategies that you can use on weekly options? With the case of weekly options, you can do just about any strategies that you actually use with longer dated option or monthly options. The only difference that you will encounter now is that you can do the strategies four times each month. Before, you are only doing it once a month with monthly options.
Many premium sellers like to take advantage of an option’s rapidly accelerating time decay curve on its final week of its life. When they use weeklys then it is surely a bonus on their part because they get to have many time decay curves. When monthly options are considered, investors get to be paid 12 times. However, with weekly option, they get to be paid 52 times per year.
The strategies that you can do with the weeklys are much the same strategies with the monthlies. You can sell naked puts and calls. You can also strategies like covered calls, spreads and condors. These strategies work well with the weeklys and also with the monthlies. The only difference is that they have a shorter time line.
The Advantage of Weekly Options
The weekly options offer investors with a short term advantage that you can’t accomplish when you opt to use monthly options. The advantage is that you have the ability to make a very short term bet on an anticipated sudden price movement or a certain news item.
For example, you are betting that the EFG stock is going to move on the first week of the month as their earnings report is due that time. When you buy or sell the EFG monthlies to capitalize on the theory you just made, you are going to risk three week’s worth of premium when you are proven wrong and EFG moves against you. The advantage of weekly option, you are only going to risk one week’s worth of premium when you are proven wrong. So, it is safe to conclude that for weekly options you can save money even if you are wrong and that you will be rewarded with a good return when you are correct with your assumptions.
However, the open interest as well as the volume of weekly options is not as high as that of the monthly expirations even if the open interest and the volume of weeklys are actually large enough to create reasonable bid ask spreads. Monthlys have this strong pinning action but with weeklys this does not happen strongly. Pinning action is where the stock tends to settle toward a strike price on its expiration day.
The Disadvantage of Weekly Options
While there can be advantages for weeklys, there are also disadvantages that can be spotted with the use of weekly options. One disadvantage is its short duration and quick time decay. You will have lesser time to repair any trade that has moved against you. You will have a difficulty in adjusting your strikes or do some kind of mean revisions in the underlying security. Another thing is that not all of the strikes in the weeklys will have good open interest and volume. Some of the strikes will have very wide spreads which is not good for strategies that are short term.
The use of weeklys can be both advantageous and disadvantageous. You can have a quick profit or loss out of it. So, you have to use weekly options carefully and wisely.
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