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Industry Spotlight: Wednesday Expirations Anyone?

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July 5, 2016
wednesday weeklys SPX
Fredrik Broden

On February 23, 2016, the Chicago Board Options Exchange (CBOE) started listing Wednesday-expiring Weeklys Options on the S&P 500 (SPX). Nice. Now, options traders have even more toys to play with, more a la carte options... and more to chew on.

Wednesday-expiring weeklys get listed on Tuesday and expire eight days later. Given that on some days the SPX weeklys represent about 50% of the CBOE’s total SPX trading volume, it’s no wonder they’re starting to add contracts that expire on different days than just Friday. Why Wednesday? Besides adding more breadth to their offerings, the deci- sion aligns with VIX futures and options expirations.

It's a Strategy Thing

So why should you care? It depends on your strategy. With VIX futures and options expiring on Wednesday, there’s volatility as positions unwind. With the addition of Wednesday expirations, you can use various spread strategies—depending on price action—that may play nicely with a Wednesday expiration. For instance, consider trading a SPX calendar spread using the Wednesday/Friday expirations 10 days apart, then cover it on Tuesday, just before expiration.

And don’t forget premiums. Because weeklys are listed on Tuesday, the premium is likely to be higher on that day, which could also depend on implied vol and time decay. By the time Friday rolls around, premiums might be lower, and it’s likely you’ll see a little pop at the beginning of the next trading week. It’s something to keep in mind if you’re a premium seller.

You can also hedge important positions or leverage the timing of earnings releases and announcements—particularly since the Fed makes its rate decisions on Wednesdays. Implied vol naturally comes into play here. When you anticipate pops in implied vol, you may want to think about selecting Wednesday weeklys from the menu.

Risky Business

Let’s face it, weeklys are short term, which means you’re fighting time decay. And yes, shorter term means you can trade more frequently and possibly find more opportunities to realize great trades. But what’s an options strategy without risk analysis? These shorter expirations come with unique challenges—namely theta, or time decay. If you’re a long trader, with weeklys, you have to hope the daily moves in the underlying exceed the daily time decay. If you’re a premium seller, you could have a lot of negative gamma, and get wiped out quickly with much smaller moves in the underlying. Gamma is often highest near expiration. And weeklys are as close to expiration as you can get. With more choices, you simply have more to trade. Just be mindful of the risks as well as the rewards of such short-term trading. Peruse the entire menu, check in with your appetite, and decide for yourself.