In 1973, the Chicago Board Options Exchange (CBOE) introduced the standard call options that we know today. In 1977, the put option was introduced. They have proven to be extremely popular as trading volume has grown at a compound annual growth rate over 25% between 1973 and 2009. Clearly, investors understand options, are becoming more comfortable with them and are using them in a variety of strategies.
Weeklys: A New Class of Options
In 2005, 32 years after introducing the call option, the CBOE began a pilot program with weekly options. They behave like monthly options in every respect except they only exist for eight days. They are introduced each Thursday and they expire eight days later on Friday (with adjustments for holidays). Investors who historically enjoyed 12 monthly expirations on the third Friday of each month can now enjoy 52 expirations per year.
Investor interest in the weeklys has surged since 2009, with average daily volume of just the S&P 500 weekly options exceeding 520,000 contracts in 2017, a 35% increase over 2016. (For related reading, see: Give Yourself More Options With Weekly and Quarlerly Options.)
What Can You Trade With Weekly Options?
Indexes with weeklys available include:
- CBOE Dow Jones Industrial Average Index (DJX)
- Nasdaq 100 Index (NDX)
- S&P 100 Index (OEX)
- S&P 500 Index (SPX)
Popular ETFs for which weeklys are available include:
- SPDR Gold Trust ETF (GLD)
- iShares MSCI Emerging Markets Index ETF(EEM)
- iShares Russell 2000 Index Fund (IWM)
- PowerShares QQQ (QQQQ)
- SPDR S&P 500 ETF (SPY)
- Financial Select Sector SPDR ETF (XLF)
Weekly Option Strategies
Just about any strategy you can implement with the longer dated options you can also do with weeklys.
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. Now you can get paid 52 times per year instead of 12. Whether you enjoy selling naked puts and calls, covered calls, spreads, condors or any other type, they all work with weeklys like they do with the monthlies, just on a shorter time line.
The Short-Term Advantage of Weeklys
In addition, during three out of four weeks, the weeklys offer something you can't accomplish with the monthlies: the ability to make a very short-term bet on a particular news item or anticipated sudden price movement. Let's imagine it's the first week of the month and you expect XYZ stock to move because their earnings report is due out this 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 you're wrong and XYZ moves against you. With the weeklys, 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.
Although the open interest and the volume of the weeklys are large enough to produce reasonable bid-ask spreads, they are usually not as high as the monthly expirations. The well-known pinning action that takes place in monthlys, where a stock tends to gravitate toward a strike price on expiration day, does not seem to happen as much or as strongly with the weeklys.
The Downside of Weekly Options
There are a couple of negatives regarding weeklys:
- Because of their short duration and rapid time decay, you rarely have time to repair a trade that has moved against you by adjusting the strikes or just waiting for some kind of mean revision in the underlying security.
- Although the open interest and volume are good, that is not necessarily true for every strike in the weekly series. Some strikes will have very wide spreads, and that is not good for short-term strategies.
The Bottom Line
The weeklys are another tool in your investor toolbox. Like most of the other tools in that box, they are powerful enough to create quick profits or quick losses, depending on how you use them. The good news is if you trade monthly options, you already have some experience with the weeklys, because the final week of a monthly is nearly identical to how a weekly behaves. In fact, during the monthly expiration week they are the same security. Anyone who has developed an expiration day (or expiration week) strategy can almost certainly use their strategy with the weeklys now. (For further reading, see: Stock Options and Weekly Options.)