Are Daily Expirations Coming?

Too Many Expiration Dates?

Monday -- a new expiration date.

As the options exchanges continue to add additional expiration days, it seems as if the time is coming when there will be options that expire on every trading day. Binary option traders can select positions that expire every hour, but there is no chance (say I hopefully) that this practice will ever come to the options exchanges.

The latest additions are SPX options that expire on Mondays. These Weeklys options will be listed for trading on a Friday, or 10 days prior to expiration.

To ensure that there are at least  two different Monday expiration dates available at all times, options with a lifetime of 17 calendar days will be listed for trading at the same time. 

The new Monday Weeklys are PM settled and the options cease trading at 4:00 PM ET on expiration day. There is an important consideration for anyone who wants to trade these options. If the exchange is closed on Monday (and there are a bunch of Monday holidays on the calendar), then expiration moves to Tuesday. In other words, traders must be alert as to when the options have one extra day of a lifetime because that affects the value of the option.

For readers who are unfamiliar with the term "PM settled," the official closing price for the underlying asset (SPX) is the closing price (as determined by Standard & Poors) on expiration day. 

Why Are There So Many Expiration Choices?

CBOE now offers Weeklys SPX options that expire on Monday, Wednesday, and Friday.

The official rationale for listing these new Monday options, according to:CBOE Holdings CEO Edward T. Tilly:  “Weeklys provide greater trading precision and with new Monday Weeklys, investors will be able to efficiently hedge over-the-weekend risks. With three different expirations in our SPX Weeklys product line, investors will have even more opportunities and flexibility when trading the S&P 500.”

How Trades Take Advantage of a Wide Variety of Options

Most rookies investors prefer to buy shares of stock or call options in an effort to "be long" the market or an individual security. Traders who are a little more sophisticated may want to "be short" the market or an individual security at various times, and they can do that by selling stock short or by buying put options. These traders have little need for so many different options.

As traders gain experience they quickly grasp the advantages that come with hedging their risk by using spreads. A spread is an option position consisting or more than one specific option. The most commonly used spreads involve buying one call and selling another call option on the same underlying asset. The same type of spread can be used with put options. a variety of expiration dates makes it possible for these traders to tweak the timing of their market expectations.

Other spreads, such as a butterfly spread, involve three different calls (or puts). Four different options (all calls or all puts) are used when trading a condor or iron condor. Trading these spreads with multiple options is not at all complicated -- once you understand the general idea.

The danger of trading iron condors is not derived from its complexity (it is not complex), but the inability of less experienced traders to understand the importance of managing risk with an appropriate position size. Too much money may be lost when the stock market behaves erratically.

It is a wonderful thing to use options to limit risk. One of my trading tenets is that it is mandatory to understand what can go wrong with every trade -- and to be able to survive when the maximum possible loss occurs. That is why risk management is so important to every trader's survival.

What Sophisticated Traders Do

Very sophisticated traders go further when tweaking positions. They construct portfolios in all risk removed. In other words, they carry positions where there is no risk associated with a market move (i.e., the positions are Delta and Gamma neutral).

The positions are also unaffected by a change in market volatility (Vega neutral) or the passage of time (Theta neutral). Such traders tweak their positions, as needed, to assure neutrality. They earn their money by buying/selling options that are mispriced (i.e., overvalued or undervalued), hedging risk, and holding them until that market mispricing disappears. Such traders appreciate the wide number of option choices because it helps them refine positions.

The exchanges are always looking for ways to attract new business, and offering additional expiration days is one of them. However, to the average investor, there will seldom be any reason to trade options that expire on Monday or Wednesday. There is one exception: When buying options for a pending news release, it pays to buy options with as little time value as possible -- and these new options should appeal to such traders.

One warning: Very short-term options come with negative Gamma and that can lead to unexpected large profits and losses. So trade these carefully -- especially if you are an option seller.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.