Flexibility and Targeted Exposure: An Intro to Weekly Stock Options

Learn how weekly stock options can help you target your exposure to market events such as earnings releases or economic events.

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3 min read
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Key Takeaways

  • All else equal, short-term options have lower premiums but higher theta and gamma
  • Some traders use weeklys to target single events, such as earnings, company news, or economic reports

Once upon a time—pre-2005 actually—stock options expired once per month, typically on the third Friday. Nowadays, you can buy and sell call and put options on monthly (“serial” or “third-Friday”) contracts, plus weekly expirations (“weeklys”) on non-serial Fridays

And if you look at options on broad-based indices such as the S&P 500 (SPX), you might see up to three expirations per week. 

Weeklys are short-term products designed to help give option traders more targeted exposure to market events, such as earnings reports and economic data releases. Plus, because the risk dynamics of options change as you get closer to expiration, some options strategies are designed for the short term. Read on to see if weeklys might be right for you.

Weekly vs. Monthly Options: Is There a Difference?

The question around weekly options is often: “What’s the difference between weekly and serial options?” The answer? More frequent expiration dates. Granted, the short-term nature of weekly options makes them inherently more risky (read on for more about the dynamics of short-term options), but an option with, say, three days left has the same inherent risks regardless of whether it’s labeled a weekly or a serial.

Weekly options expire like the third-Friday options—standard deliverable options have a multiplier of 100, and at any time on or before expiration, you can exercise a long option (or be assigned a short option) into 100 shares of the underlying stock at the strike price.

The expiration difference: With weekly options, every Friday is expiration day (see figure 1). Unless, of course, that Friday is an exchange holiday, in which case the options expire on that Thursday (learn more about how options expiration works).

FIGURE 1: ON ANY GIVEN FRIDAY. Sample option chain with weekly and serial or “third-Friday” expiration dates. Image source: The thinkorswim® platform from TD AmeritradeFor illustrative purposes only.

Some Characteristics of Shorter-Term Options

Although there are no real differences in the contract specifics of weeklys, their shorter life span does mean a few things:

  • Typically smaller premiums, all else equal. For a call or put option of any strike price, the shorter the time to expiration, the smaller the premium. So, buying a weekly option expiring in the first or second Friday of the month will mean less premium outlay compared to buying an option expiring on the third Friday. But for those interested in selling options, the amount of premium collected will be lower.
  • Faster rate of time decay. Though the premium may be smaller, the daily time decay (“theta”) is higher the closer you get to expiration. Here’s a refresher on theta.
  • More rapid price changes compared to longer-term options. Sure, all options prices can fluctuate due to changes in the price of the underlying stock and changes in implied volatility, but the delta of short-term, at-the-money options tend to have a higher responsiveness to changes in the price of the underlying. In other words, these options have a higher gamma — more price risk during volatile periods. 

Pinpointing with Weekly Options Strategies

Given the dynamics of weekly stock options, how might you incorporate them into your strategy? Here are a few ideas.

Targeting lower premium and higher gamma Suppose you think a stock might have an outsize move on an earnings report or other news announcement. Or maybe you’re expecting the broad market to experience a larger-than-normal move from an economic report.

If you’ve got a view on the direction, you might consider buying a call or put option. If you’ve got a view of the magnitude, but not the direction, you might consider a straddle or a strangle using weekly options. 

Targeting higher theta. On the other hand, perhaps you think the market has priced in too big a move off an earnings or economic release. In this case, you might consider selling options or options spreads. For example, some option traders will choose to sell an iron condor (a defined-risk strategy consisting of a short vertical call spread and a short vertical put spread) around earnings reports.

Note that in each instance, using the weekly options allows you to target your exposure to specific market events.

Targeting expiration frequency. Do you sell covered calls against stocks you own? Some covered call adherents prefer weeklys as a way to potentially maximize the bang-for-the-theta-buck. Sure, the premium is typically lower, but because it’s a strategy that can be repeated week after week, you’re hoping to compensate for that lower premium.

Ah, But There’s a Downside 

With options, there’s always a trade-off. For every added opportunity, there’s an added risk. First, the added flexibility on these short-lived instruments requires close monitoring. Volatility can turn profits into losses with a small movement in the underlying stock. 

In other words, if trading weeklys means more time is spent babysitting, make sure you’re adequately compensated for your time and mental energy. 

And then there are transaction costs. If you’re considering whether to trade short-term options more often versus longer-term options less frequently, remember the more you trade, the more you’ll spend in transaction costs. But perhaps that’s the price of flexibility and targeted exposure.

The Bottom Line on Weekly Options

Weekly options aren’t that different from their longer-term counterparts. Yes, premiums can be lower, and yes, they can have higher gamma and theta values. But in the end, they’re just options.

Weekly Options with Covered Calls and Short Puts

Doug Ashburn is not a representative of TD Ameritrade, Inc. The material, views, and opinions expressed in this article are solely those of the author and may not be reflective of those held by TD Ameritrade, Inc.

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Key Takeaways

  • All else equal, short-term options have lower premiums but higher theta and gamma
  • Some traders use weeklys to target single events, such as earnings, company news, or economic reports

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