WHAT ARE WEEKLY OPTIONS?

 

What are Weekly Options?

 

   Weekly options, often referred to as "weeklies," are short-term options contracts that have an expiration date one week after they are listed. Unlike traditional options, which typically expire on the third Friday of the month, weekly options offer traders and investors the opportunity to engage in options trading on a much shorter time horizon. Weekly options were first introduced by the Chicago Board Options Exchange (CBOE) in 2005 and have since become a popular tool among traders for hedging, speculating, and income generation.

 

Key features of weekly options

 

Short-term expiration

 

   Weekly options have an expiration cycle of seven days, making them highly time-sensitive instruments. They are typically listed on Thursday or Friday and expire the following Friday. This rapid expiration period provides traders with more frequent opportunities to trade and adjust their positions compared to monthly options.

 

Available on various underlying assets

 

   Weekly options are available on a wide range of assets, including stocks, indices, and exchange-traded funds (ETFs). Popular underlying instruments for weeklies include major indices like the S&P 500 (SPX) and NASDAQ (NDX), as well as highly traded stocks like Apple (AAPL), Tesla (TSLA), and Amazon (AMZN).

 

Lower premiums

 

   Because of their short duration, weekly options typically have lower premiums compared to monthly or longer-term options. This is because the time value of an option decreases as the expiration date approaches, and weekly options have significantly less time value than longer-dated options.

 

Higher theta decay

 

   Theta measures the rate at which an option’s value decays as it approaches its expiration. Weekly options experience rapid time decay, especially in the final few days leading up to expiration. This characteristic can be advantageous for options sellers, as the value of the option decreases quickly, allowing them to potentially capture profits through premium decay.

 

Flexibility for traders

 

   Weekly options provide traders with more flexibility, as they offer multiple opportunities each month to establish and close positions. This frequent expiration allows traders to capitalize on short-term market events such as earnings reports, Federal Reserve meetings, or other significant economic releases.

 

How weekly options work

 

1. Option types: calls and puts

 

   Like traditional options, weekly options come in two types: calls and puts. A call option gives the buyer the right, but not the obligation, to buy the underlying asset at a specific strike price before the option expires. A put option, on the other hand, gives the buyer the right to sell the underlying asset at a specific strike price before the option expires.

 

2. Strike prices and expiration

 

   Weekly options, just like monthly options, are listed with various strike prices. These strike prices can be in-the-money (ITM), at-the-money (ATM), or out-of-the-money (OTM) depending on the price of the underlying asset. Weekly options expire on Fridays, and traders must either exercise their options or close their positions before expiration to avoid having the option expire worthless.

 

3. Settlement

 

   Weekly options on stocks and ETFs are typically settled in shares, meaning that if the option is exercised, the trader will either buy or sell the underlying asset. Weekly options on indices, like the S&P 500 (SPX), are typically cash-settled, meaning that any gains or losses are settled in cash rather than the actual underlying asset.

 

Benefits of weekly options

 

Frequent trading opportunities

 

   The short-term nature of weekly options allows traders to engage in multiple trades within a month. This can be particularly advantageous for active traders who want to take advantage of short-term price movements or specific events, such as earnings announcements or macroeconomic data releases.

 

Enhanced flexibility for hedging

 

   Weekly options offer a more precise way to hedge short-term risk. For example, if a trader is concerned about a potential market downturn due to an upcoming event, they can purchase weekly put options to protect their portfolio without having to commit to a longer-term options contract. This targeted hedging can help reduce costs associated with time decay in longer-dated options.

 

Lower premiums

 

   The lower premiums of weekly options make them an attractive choice for traders with smaller capital. Since the time value is significantly lower due to the short expiration, traders can enter options positions at a lower cost compared to monthly options. This also allows traders to deploy more strategies with smaller initial investments.

 

Volatility plays

 

   Weekly options are popular for traders who want to capitalize on short-term volatility. Market-moving events, such as earnings reports, company news, or economic data releases, often cause a surge in volatility, which can result in large price swings. Weekly options allow traders to take advantage of this short-term volatility without having to hold a longer-term position.

 

Income generation

 

   Selling weekly options is a common strategy used by income-oriented traders. Since weekly options decay rapidly in value, sellers can collect premiums quickly as the expiration date approaches. This strategy can be particularly effective in a range-bound market where price movements are limited, allowing sellers to generate consistent income from selling options contracts.

 

Risks of weekly options

 

Increased sensitivity to time decay

 

   While the rapid time decay of weekly options can be advantageous for options sellers, it can work against options buyers. Since weekly options lose their time value quickly, buyers may face significant losses if the underlying asset doesn’t move in the expected direction within a short time frame. Time decay can erode the value of the option even if the price of the underlying asset moves only slightly.

 

Higher transaction costs

 

   Due to the short-term nature of weekly options, traders may find themselves trading more frequently, which can lead to higher transaction costs. Commissions, fees, and bid-ask spreads can add up over time, especially for traders who engage in multiple trades per week.

 

Risk of overtrading

 

   The availability of weekly options can tempt traders to overtrade, especially those who are looking to make quick profits from short-term price movements. Overtrading can lead to poor decision-making, higher transaction costs, and increased risk exposure. It’s important for traders to stick to their trading plans and avoid being lured into excessive trading.

 

Limited time for recovery

 

   One of the biggest risks of trading weekly options is the limited time frame. If the trade goes against the trader, there is little time to recover losses or adjust the position before expiration. This makes weekly options a higher-risk instrument compared to longer-dated options, where traders have more time for the market to potentially move in their favor.

Higher volatility sensitivity

 

   Weekly options are highly sensitive to changes in implied volatility. A sudden spike in volatility can cause large price fluctuations in the option’s premium. While this can create opportunities for profit, it can also increase the risk of unexpected losses, especially for inexperienced traders who may not fully understand how volatility impacts option pricing.

 

Strategies for trading weekly options

 

Straddle and strangle

 

   Traders expecting a big move in the underlying asset but unsure of the direction can use strategies like straddles or strangles. In a straddle, the trader buys both a call and a put option at the same strike price, while in a strangle, the options have different strike prices. This allows the trader to profit from large price swings regardless of the direction of the movement.

 

Iron condor

 

   An iron condor strategy involves selling both a call spread and a put spread, allowing the trader to benefit from low volatility. This strategy is commonly used when the trader expects the price of the underlying asset to remain within a certain range, allowing the options to expire worthless, and the trader keeps the premiums received from selling the options.

 

Covered call

 

   In a covered call strategy, the trader owns the underlying asset and sells a call option on it. This allows the trader to generate income from the premium while still holding the asset. The risk is that if the stock rises above the strike price, the trader may have to sell the stock at the strike price.

 

Conclusion

 

   Weekly options offer a unique opportunity for traders and investors who want to take advantage of short-term price movements, hedge against immediate risks, or generate quick income. While they provide flexibility and frequent trading opportunities, they also come with increased risks due to their short time frame and rapid decay in value. Successful trading of weekly options requires a deep understanding of the market, disciplined trading strategies, and a keen awareness of the risks involved.