There have been a number of advantageous developments for options traders over the past 10 years. One of those advances offers you the ability to potentially take advantage of market events more efficiently—with options that expire weekly.
In contrast to traditional options contracts that expire monthly, these types of options contracts—named “Weeklys” by the Chicago Board Options Exchange (CBOE)—may be particularly attractive for short-term traders who might be looking to actively trade a particular position while employing the leverage provided through options.
The unique feature of Weeklys
The construction of Weeklys is nearly identical to traditional options contracts in every way but one. Just like traditional options contracts, Weeklys grant the owner the right, but not the obligation, to buy or sell a security at a specified price before a certain date. The buyer of a Weekly call has the right to buy the underlying stock at a set price until the option contract expires. The buyer of a Weekly put has the right to sell the underlying stock at a set price until the date that the contract expires.
This date, known as the expiration date, is the lone differentiator between Weeklys and traditional options, and is critical to understanding how weekly options work. As their name suggests, Weeklys expire every week, typically on Fridays at market close. Traditional options contracts typically expire on the third Friday of each month. On the other end of the spectrum, LEAPS can have expirations as far out as three years.
The benefits of Weeklys
Weeklys are available for a wide range of securities, including stocks, ETFs, and broad-market indexes (see sidebar). Fidelity offers Weeklys; simply open an options chain in Active Trader Pro® and look for options that have expirations one week out.
There are several important implications for the shorter expiration date of Weeklys. Due to the relatively short time until expiration, Weeklys generally sell at a lower premium to otherwise equivalent options with longer expirations. The reason should be intuitive: Because there isn’t as much time value (i.e., the value attributed to the options associated with the time the option holder has left to exercise), buyers would not pay as much for the option because they would not have as much time for it to be in the money.
Contrast this pricing aspect of Weeklys with that of LEAPS, which usually sell at a higher price than traditional options because of the greater time value—allowing for a greater possibility the option could finish in the money.
Perhaps the most valuable benefit of Weeklys is that it may be possible to more efficiently employ short-term strategies—including targeting volatility associated with an earnings announcement, economic report, or other key event that might occur on a specified date—compared with longer-term options. Instead of purchasing a regular options contract that might last several months, you can target a specific date and time period using Weeklys.
A note of caution
The characteristics of Weeklys can also present some unique risks, however.
For instance, assume you enter into a position using traditional options that does not go as you expect. If you have enough time until expiration, it may be possible to repair the position or “leg out” in order to hedge your risk exposure. Because of the short window associated with Weeklys, it may not be possible to effectively manage your risk in this fashion. Also, you may want to practice-trade Weeklys first to get a sense of how the implied volatility, Greeks, and other factors may differ from traditional options.
These risks are in addition to those inherent to all options. Before trading any type of options contract, you should fully understand how they work and what the risks are. If you do trade options, Weeklys may help you find a better contract for your strategy.
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