Weekly Options Trading, or commonly called “Weeklies”, are options that trade for about one week.
New Weeklies are listed each Thursday or Friday and expire the following Thursday or Friday except the third week of the month because that is when the regular monthly options have only one week left to expiration.
Except for the shorter duration, Weeklies generally have the same contract specifications and offer the same continuous, two-sided quotes as standard options.
History of Weekly Options
October 2005 – Weekly Options, first introduced by the Chicago Board Options Exchange (CBOE), the largest U.S. options market, which are one-week options as opposed to traditional options that have a life of months or years before expiration.
These Weeklies are based on the index options: SPX, XSP, OEX, and XEO. These are cash-settled options.
As of June 04, 2010, the Chicago Board Options Exchange (CBOE) announced that it will begin trading new Weekly Options on four exchange traded funds (ETF’s): Standard and Poor’s Depositary Receipts (SPY), Nasdaq-100 Index Tracking Stock (QQQQ), DIAMONDS Trust, Series 1 (DIA), and iShares Russell 2000 Index Fund (IWM), are now traded.
June 25, 2010 – The Chicago Board Options Exchange (CBOE), introduced one-week options, or weeklies, on four individual equities — Bank of America (BAC), Apple (AAPL) and Citigroup (C) and U.S-listed shares of BP (BP).
Beginning on Thursday, July 1, 2010 – all new Weeklies series at CBOE will begin trading on Thursdays and expire the following Friday. Previously, new series were listed each Friday and expired the following Friday.
July 5, 2010 – the Weekly Options on the following became available: GLD, XLF, EEM, C, BAC, AAPL, BP, F, and GOOG.
More and more stocks, indexes, and ETFs have been added to the CBOE weekly list as they have become more and more popular. For a complete up to date list: click here: http://www.cboe.com/micro/weeklys/availableweeklys.aspx
Why Were Weeklies Introduced?
Very simple. To make money.
The CBOE, the brokers, and the Stock markets that options trade on all make money when more options are traded. The more trades, the more commissions and trading fees they can collect. The CBOE had already introduced monthly, quarterly, and LEAP options. Their analysis showed that many people were trading options in the last two weeks before expiration.
So they introduced one week options, and they have a hit on their hands. As of today, one-fourth of all option volume in a popular stock like Apple is in the weekly options. Weeklies volume for the OEX is over 30% of the total option trading volume.
As they introduce more and more underlyings to trade weeklies on, the trading volume continues to increase. Cha-ching! At least for the CBOE. For options traders it is a different story, but more on that in another article.
Using Weekly Options
Weeklies can be used in various strategies just like standard options: Covered Calls, Collars, Married Puts, Debit and Credit Spreads, Iron Condors, Calendars and Butterfly positions. The premiums will be slightly lower compared to the standard expiration options naturally due to the lower time value.
Weeklies are a good way to gamble. If Vegas or online gambling are not options, weeklies might be what you are looking for. Why do I say that? Because of the lack of time. They do not allow you the luxury of being wrong on your assessment.
Let’s say the earnings are coming up in your favorite stock, XYZ. And you think earnings will be great and the stock will shoot higher. Your trading options are to buy stock, buy monthly call options, buy a monthly debit spread, or sell a monthly put spread.
Buying stock is the most expensive way to trade it. Buying monthly call options is much cheaper and you could double/triple your investment. Buying monthly debit spreads is an even cheaper way to play it. But the gain is capped. If you sell a monthly put spread, you have a higher percentage probability of making money, but it would only be a percentage of the amount you put at risk.
Stock Expensive 5-10% returns if correct
Buy Calls Less Expensive Potential for 100% return
Buy Debit Spread Cheapest Return is capped. Potential around 50% return
Sell Put Spread Given a credit 5-10% return but highest probability of making a profit.
But what about weeklies?
What if you bought weekly call options? They would cost a fraction of what the monthly call options would cost and you could earn several hundred % if you are right about the direction of the stock. Wow! A potential 1000% gain. That sounds amazing.
And it does happen. How often will it happen to you? Probably not too often.
Because you also have the chance of being wrong. What happens if the stock drops in price on earnings or it does not move much at all?
Stock No problem. Just sell the stock and lose a little
Buy Calls Problem, but if there is enough time premium you will lose about 50% of the investment
Buy Debit Spread Lose less than 50% of the investment because of the hedged position.
Sell Put spread Could still profit, especially since volatility will drop after earnings
Buy Weekly Calls Lose it all! With only a couple days to expiration your trade is toast. 100% loss.
Moral of the story: Buying weekly options is a sucker’s game.
What about selling weekly options? Since they only have a few days to expiration and some hefty values, can’t we sell these and make a killing with very little risk?
Not unless you do it right. I explain in the next post.
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