Weeklys Options

Short-Term Trades

Close-Up Of Calendar Date
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Beginning in 1973 (when the CBOE opened its doors), listed options came with only three expiration dates -- and those were three months apart.

Eventually, options with a greater variety of expiration dates were added including

  • LEAPS (Long-Term Equity AnticiPation Series) offer expiration dates up to three years in the future)
  • Weeklys, with a lifetime of only eight days (Thursday to the following Friday).

    In continuing to provide products that will interest the trading public, in 2010, the Chicago Board Options Exchange (CBOE) began trading options that expired in only one week. "Weeklys" options were available only on four exchange-traded funds (ETF's): SPY, QQQ, DIA, and IWM.

    These new options were given the trademarked name"Weeklys" -- despite the obvious misspelling. They have become extremely popular among traders because short-term options are especially attractive to speculators.

    • The rapid time decay makes them the option of choice for premium sellers.
    • The relatively small premium makes them attractive to option buyers who are looking for a lot of bang for the buck.

    Weeklys are listed only for the most actively traded stocks, ETFs, and indexes. The list of Weeklys is published by the CBOE and is updated  (as is obvious) weekly.

    Inexpensive Options to Buy

    When a trader believes that a specific stock will undergo a significant price change within the next few days (probably because news is pending), it pays to buy options with a shorter, rather than longer lifetime.

    It is important to understand why this is true.

    Longer-term options come with more time premium, and there is no good reason to spend extra money on time premium for options that expire after the stock price changes.

    If your expectation is incorrect and the stock moves in the wrong direction, then the more the option cost, the greater your loss.

    Similarly, if the stock moves as expected and-and the option moves ITM, then the extra time premium will prove to have been an unnecessary expense. It is not easy to choose an appropriate expiration date, but part of the reason behind the option-buying strategy is estimating when the price change will occur.

    On the other hand, the advantages to owning longer-term options is that time decay is slower than with shorter-term options, and there is more time for the anticipated price change to occur. Note: Very long-term options (LEAPS) are not appropriate for short-term traders because volatility plays an especially large role in determining the market price of LEAPS. When predicting a directional price change, there is no reason to gamble on future implied volatility. Thus, owning LEAPS options should be avoided when your strategy requires correctly predicting a price change.

    Cautionary Notes:

    • It is tempting to own Weeklys options because they are relatively inexpensive. However, if the price change that you anticipate for the underlying asset does not occur quickly, the rapid time decay is rapid may result in your investment becoming worthless in only a few days.
    • It is tempting to sell Weeklys options because they have a high Theta (rapid time decay). However, these options are seldom far out of the money (because a short lifetime, coupled with being far OTM, would make the premium too small to be worth the risk of selling) and a change in the underlying asset price could move these options into the money -- resulting in a large loss. To appreciate the risk involved with selling such options, take the time understand the concept of gamma and trading with negative gamma.