stock doesn’t expire and doesn’t suffer from time
decay, but it uses a lot more trading capital than a
Weekly option, and it can have a lot more risk. If you
were going to buy 100 shares of that $100 stock in the
example, the margin requirement would be $5,000.
But the weekly 100 strike call would cost you only
$110. And let’s say the stock drops in price. The max
loss on the long Weekly call is $110—as opposed to
$10,000 on the long stock. While the stock position
has advantages, it also has greater risk.
So how about just buying options with a further
expiration date? You could buy more to get the gamma
equal to the Weekly position, and the time decay
would still probably be lower. The risk here is that the
larger position in options with a further expiration date
has a much higher vega, or sensitivity to changes in
implied volatility. Remember when I said that Weeklys
let you tailor the speculation? Weekly options have low
vega, and don’t move as much when volatility goes up
or down. That means that you can focus more on what
the stock price is doing. With longer-dated options,
you have to be aware of what volatility is doing as well.
A CASE AGAINST SELLING
Now, the reason that every trader doesn’t just go out
and short Weekly options to take advantage of the
steep time decay is that the lower price of the Weeklys
makes the absolute amount of decay relatively lower.
Sure, the rate is high, but the overall amount is
smaller. Just as an offense has a running game and a
passing game, each with its own particular risk and
potential reward, buyers of Weekly options take the
risk of that big move in the stock not happening while
they battle negative time decay. Sellers have to decide
whether the smaller credit they get from shorting the
Weekly is worth taking the risk of a big move in the
stock that would create a huge loss in that position.
GETTING IN THE GAME
So, ready to start trading Weeklys as part of your
game plan? Here are some things to consider during
WEEKLYS ALLOW YOU TO MAKE VERY
TAILORED SPECULATIONS ON SHORT-TERM MOVES IN THE STOCK. WITH
FEWER DAYS TO EXPIRATION, THEY’RE
LESS EXPENSIVE THAN OTHER OPTIONS
AT THE SAME STRIKE. AND THEY GIVE A
LOT OF BANG FOR THE BUCK.
2. HOW TO SHORT If you want to try to take advantage of the Weeklys’ time decay, you could consider
shorting Weekly option spreads in the index products.
You can see those symbols on the public watchlist as
well. The index products tend to be less volatile than
individual stocks, and can be a way to test out short
option strategies. Bear in mind that some short strategies can carry unlimited risk. So be sure to understand
all relevant risk factors and whether such strategies
are suitable for your portfolio.
3. WATCH FOR EARLY SETTLEMENT Some Weekly
options are based on cash-settled indexes such as the
OEX, XEO, DJX, and SPX. The DJX and SPX Weekly
options stop trading on Thursday afternoon and settle
on Friday morning. For more information, check the
Weekly option specifications on the Chicago Board
Options Exchange website at www.cboe.com.
What should be clear from the advent of Weekly
options is that equity markets are no longer targeted to
just long-term investors. As options are becoming
increasingly popular with traders, the industry is scrambling to find ways to quench their thirst for capitalizing
on short-term events that move markets. Heck, recently,
the CBOE petitioned the SEC to include options that
expire daily in its arsenal of products! Who knows if
that’ll happen, but if “Dailys” are on the horizon, so
much for the red zone—you’re literally at the goal line.
To find the list of
Weeklys options currently trading, log on to
the TOS platform, look
on the Market Watch
tab of the trading
software, and choose
“Weeklys” from the
If you’re looking for
earnings plays, the
icons next to the
1. CURRENTLY A SMALL BASKET Weeklys are available on more than 15 different stocks. Individual
stocks sometimes have their biggest price swings
around earnings numbers. If you’re buying Weekly
options to speculate on a big price move on earnings,
double-check to make sure the earnings are
announced before the Weeklys expire (see callout,
left). Keep in mind that if you guess wrong and the
position moves against you, you could lose the entire
investment amount spent on the option.
The information contained in this article is not
intended to be investment advice and is for illustrative purposes only. Spreads and other multiple-leg
option strategies can entail substantial transaction
costs, including multiple commissions, which may
impact any potential return. Be sure to understand all
risks involved with each strategy, including commission costs, before attempting to place any trade. Be
aware that assignment on short option strategies discussed in this article could lead to unwanted long or
short positions on the underlying security. Customers
must consider all relevant risk factors, including their
own personal financial situations, before trading.
Options involve risk and are not suitable for all
investors. Supporting documentation for any claims,
comparisons, statistics, or other technical data will be
supplied upon request.