Weekly Options? Maybe For You, Not For Me

When I talk about options and their expirations I normally refer to monthly or quarterly options that expire on the third Friday of the month. It would, however, be remiss of me not to discuss options that expire every week. I read today that 40% of CBOE options volume is in the weekly options.

I don't like them very much simply because I advise my clients not to play the expiration game and close their positions on the Thursday before expiration at the latest. For your average retail trader/investor expirations, particularly in American style options which have physical delivery of the underlying asset, are best left to professional traders.

However, who am I to argue with the market? So, let me take this opportunity to talk about the weeklies.

What strategies can you implement with weekly options? Well, just about any strategy you do with the longer dated options, except now you can do it four times each month.

For premium sellers who like to take advantage of the rapidly accelerating time decay curve in an option's final week of its life, the weeklys are a bonanza. In fact, you can sell weeklies against your longer dated options to bring down your net purchase price.

Weeklies have another advantage due to their short lifespan. You do a short term speculative trade relatively cheaply due to their reduced time value.

Let's imagine it's the first week of the month and you expect XYZ  to move because the earnings report is due out that week. While it would be possible to buy or sell the XYZ monthlies to capitalize on your theory, you would be risking three weeks of premium in the event that you're wrong and XYZ moves against you. With the weeklies, you only have to risk one week's worth of premium. This will potentially save you money if you are wrong, or give you a nice return if you are correct.

So, what's not to like? Well, because of their short duration and rapid time decay, you rarely have time to repair a trade that has moved against you by either adjusting the strikes or just waiting for some kind of mean reversion in the underlying security.

And, although liquidity and volume may be good, that is not necessarily true for every strike in the weekly series. Some strikes will have very wide bid/offer spreads, and that is not good for short term strategies. Finally, if you do as I teach and get out the day before expiration, the option really has only a four day lifespan.

In conclusion, while they are not necessarily for me, they might be just your weekly cup of tea.

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