Give Yourself More Options With Weekly and Quarterly Options

By Elvis Picardo, CFA AAA

Weekly and quarterly options are similar to standard option contracts in most respects, except for one major difference: their expiration date. Weekly options were initially launched by the Chicago Board Options Exchange (CBOE) in October 2005 as one-week options, but now refer to options that expire on any Friday other than the third Friday of the month (which is the case with standard options). Introduced by the CBOE in July 2006, quarterly options expire on the last trading day of each quarter; they are targeted primarily at the institutional market.

Why Were Weekly and Quarterly Options Introduced?

Weekly and quarterly options were introduced to give a greater choice of option expirations to investors and enable them to trade more efficiently. Weekly options are designed to allow investors and speculators to trade around news and events such as economic data releases and earnings announcements. For example, an investor who wishes to take a very short-term bullish option position on a company, ahead of its earnings report to be released later that week, can buy weekly calls on the stock. Since these calls only have a few days to expiration, they will typically be significantly cheaper than calls that are weeks away from expiration. As another example, if an investor is nervous about downside risk in the near term, he or she could consider buying weekly puts on a market index to hedge the risk of a broad decline.

Quarterly options are aimed at money managers and institutional investors who typically rebalance their portfolios on the last day of a quarter. As quarterly options have large contract sizes, they are not suited for the typical retail investor.

Features of Weekly Options

Weekly options or “weeklys” have a contract duration of approximately one week. They were initially listed by CBOE on Fridays to expire on the following Friday. However, since July 1, 2010, they have commenced trading on Thursdays and expire on the following Friday, allowing investors to roll over their weekly option trades more effectively.

As of March 6, 2014, weekly options were available on more than 325 securities, primarily equities and ETFs along with a handful of equity indices. Most of these securities have expanded weekly options available. The complete list of available weekly options can be viewed on the CBOE site.

Expiration: Weekly options expire on any Friday of the month, except for the third Friday. They are also not listed for expiration on a Friday where a quarterly option is set to expire. If the listing date or expiration date of a weekly option falls on a holiday, it is moved back by one business day.

Settlement and last trading day: A key distinction between standard options and weekly options is their settlement time, which dictates the last day on which they can be traded. Note that the last day for trading standard options is the third Friday of the month, and they expire on the following day (Saturday). With weekly options, the last trading day depends on whether the option is p.m.-settled or a.m.-settled.

Weekly options on all equities and exchange-traded funds (ETFs) are p.m.-settled, which means that exercise and assignment are determined after the close. Therefore, the last trading day for p.m.-settled options is the expiration day, which is Friday.

Index options may be a.m.-settled or a.m.-settled. The last day for trading a.m.-settled options is the day before expiration, (Thursday.) These options are settled using an index value that is calculated based on the opening sales price of each component of the index on the expiration day, i.e., Friday.

Strike price restrictions: CBOE imposes a limitation on the number of weekly options that can be offered on a security. In addition, all strike prices listed for weekly options must be within 30% of the current value of the underlying security. As an example, the lowest strike price for weekly options on Apple (Nasdaq:AAPL) on March 10, 2014 – when it closed at $530.92 – was $410. No such restriction applies for standard options.

S&P 500 weekly options: Weekly options on the S&P 500 index (SPXW) are quite different from other weekly options and are known as “End-of-Week” or “Week-Ends.” CBOE lists and maintains six consecutive SPXW expirations at any given time, excluding the current expiration. Thus, as of March 6, 2014, the available expirations for the SPXW options were: March 7 (the current expiration), March 14, March 28, April 4, April 11, April 25 and May 2.

Unlike the standard contract size of weekly options, the SPXW options have a large contract size, with a $100 multiplier. This means that if the S&P 500 is trading at 1800, the SPXWs would have a notional size of $180,000. Settlement is in cash, while exercise is European-style (i.e., exercise can only be on expiration date. See "American Vs. European Options"). These options are p.m.-settled on the last trading day, which is typically a Friday. Their popularity has surged in recent years, with average daily volume of the SPXW options rising from less than 5% of all S&P 500 options traded in 2010, to more than 30% in December 2013.

Features of Quarterly Options

While weekly options are available on a wide range of securities, as of March 10, 2014, quarterly options were only available on nine major indices and ETFs:

  • Diamonds Trust Series 1 (ARCA:DIA)
  • Energy Select SPDR (ARCA:XLE)
  • iShares Russell 2000 Index Fund (ARCA:IWM)
  • Mini-SPX (XSP)
  • Nasdaq-100 Index Tracking Stock (QQQ)
  • S&P 100 – European Style (XEO)
  • S&P 500 (SPX)
  • S&P Depositary Receipts / SPDR (SPY)
  • SPDR Gold Trust (GLD)

Quarterly options have a $100 multiplier, which means that they have a notional dollar value equal to 100 times the level of the index or ETF. They expire on the last business day of a calendar quarter and are p.m.-settled, which means that they can be traded right up to and including the expiration date.

Except for the XSP, XEO and SPX indices, each security can have contracts listed for four consecutive calendar quarters plus the last quarter of the next calendar year, with settlement in physical terms. The XSP, XEO and SPX indices can have up to eight quarterly option contracts listed at the same time; exercise for these quarterly options is European-style only, with settlement in cash.

Pros and Cons

Weekly options have the following advantages:

  • Lower outlay: Since they have lower time value than standard options, weekly options involve a lower outlay of cash for an option buyer.
  • Flexibility to select specific expiration date: Unlike standard contracts, which have a very limited range of expiration dates, an investor has the flexibility to select a specific expiration date for an option strategy through weekly options.
  • Available for wide range of equities and ETFs: Weekly options are available for more than 325 of the most widely-traded equities, ETFs and indices.

The drawbacks of weekly options include:

  • Commissions are higher on a percentage basis: Since most brokers charge a flat fee to put on an option trade, commissions for weekly options may work out to be higher on a percentage basis than for standard options.
  • Wider bid-ask spreads and lower liquidity: Weeklys may also have wider spreads and lower liquidity than standard options contracts.
  • Smaller premiums for option writers: The flip side of the smaller premiums paid by option buyers for weekly options is that options writers receive smaller premiums as compared to standard options.
  • Difficult to “repair” a losing trade: The limited time to expiration of weekly options makes it difficult to rollover or repair a losing trade.

With quarterly options, the primary benefit is that their expiration coincides with the quarter-end, enabling institutional investors to implement hedging and other option strategies more effectively. The main drawbacks are the fact that they are only available for a few major indices and ETFs, and the wider spreads due to limited liquidity. As well, their large notional size puts them out of reach of the average retail investor.

The Bottom Line

Weekly and quarterly options provide a greater choice of option expirations to investors, enabling them to trade more efficiently. Weekly options, in particular, may be suitable for retail investors who are familiar with the risks of trading options.

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