Weekly Options

Trading Weekly Options

Weekly options were first introduced in 2005.  Initially the weekly options covered only index options, however with time their popularity has increases.   Now weekly options cover many stocks, indices and ETFs. Currently the CBOE (Chicago Board Options Exchange) lists weekly options on 76 indices and stocks.  The correct name of weekly options is “Weeklys”.  See the weekly options list for the complete and updated listing.

Advantages of Weekly Options

There are several option strategies that are enhanced by weekly options.  Some option strategies revolve around options expiration.  In the past option traders were able to use options expiration strategies only once a month.  Since the introduction of weeklys traders are able to use these strategies on a weekly basis.

The main advantage of weekly options is that they experience significant time decay and are very sensitive to price movements (highly gamma sensitive).  These can be both advantages and disadvantages depending on the option strategy used.

Expiration day trades using weekly options

As options near expiration they undergo time decay.  On expiration day most of the option value has been eroded by time decay and so are relatively cheap.  This type of option strategy relies on the cheap option prices of expiration day and trading weekly options which have large intraday volatility.  The profit on this trade is made by proportionately large directional movement.  Long straddles using weekly options are the preferred option strategy for this trade.  The risk of this trade is the proportionately large time decay and volatility crash of expiration day.

Profiting from time decay using weekly options

A popular option strategy is to sell options and so profit from the positive theta of the trade (time decay).  Time decay is a consistent and known value.  The aim of this trade is to buy back the options at a cheaper price and so pocket a profit.

Weekly options are ideal for profiting from time decay over short periods of time.  The maximal proportional time decay occurs over the last weekend before options expiration and over the Thursday night prior to expiration.  In theory, picking stocks which show low volatility over the planed trading period would make ideal candidates.  Using weekly options for this type of trade can theoretically produce a consistent weekly income.

This option strategy involves opening a short option trade with Weeklys.  The exact type of option strategy may involve selling call or put options, opening short strangle or straddles or ratio spreads.

Covered Call Writing with Weekly Options

Another popular option strategy is writing covered calls.  This means selling calls which is covered by ownership of the underlying stock so that the position is a covered rather than a naked position.  Weekly options allow traders to collect option premiums on an ongoing basis rather than the previous monthly basis before their introduction.

In theory the premiums collected using weekly options to write covered calls can be higher than when using regular monthly options.  However there can be more risk of significant losses due to the large gamma risk, the risk related to a large movement in price.

Trading Earnings Announcements with Weekly Options

Trading earnings can be a highly profitable form of options trading.  There are different types of earnings trades, but the one I favor is a vega play. This means that the trade profits from changes in volatility.

The earnings trade involves selling options, usually in the form of an overnight straddle or strangle.  The advantage of weekly options for this type of trade is that the volatility change is amplified by proximity to expiration.  Every week is expiration week with weekly options.

Hedging positions with weekly options

Weekly options are an extremely useful and cheap hedging tool for longer term position.  For example iron condor traders using monthly expiration options can by protection for their positions on a weekly basis using the weekly options.  This form of hedging can be more flexible and cheaper than using long dated option series.

Disadvantages of trading weekly options

  • The main disadvantage of weekly options for option sellers is their sensitivity to price movement.
  • The main disadvantage of weekly options for option buyers is the rapid time decay of weeklys.
  • Weekly options for some stock options may have lower liquidity and larger bid-ask spreads than their corresponding monthly options.
  • Trade repair or adjustment of options positions is much harder than when trading options positions over a longer period of time.

How weekly options work

Weekly options are listed on Thursday morning for all index, stocks and ETFs.  The last trading day for all weeklys is on the following Friday.  The only exceptions are the weekly options on the Dow Jones Industrial Average Index (DJX), Nasdaq 100 Index (NDX) and Russell 2000 Index (RUT) whose final trading day is on the following Thursday. These options are settled on the following Friday morning.  The value used for settlement of these weekly options is the price of the index at the open.

Often public holidays fall on Fridays.  In this case the expiration day is moved to the Thursday and the listing day for the weekly options of the following week is moved to the Wednesday before the holiday.

Best weekly options to trade

The best weekly options to trade on a regular basis depend on your option trading strategy.  As a general rule you should select weekly options that have the high open interest, options volume and narrow bid ask spreads.  This is critical in order to minimize trading costs and slippage.

I find that the best weekly options to trade are the high volume stocks.  Google (GOOG) options and AAPL options highly liquid and make good trading candidates.  Other potentially good weekly options to trade include Amazon (AMZN), Caterpillar (CAT), Goldman Sachs (GS), Priceline (PCLN) and Netflix (NFLX).  You can see an example of a trade using GOOG weekly options.