Weekly options were introduced by the Chicago Board Options Exchange in 2005. Now they’re all the rage, especially as more traders use them to position for earnings releases.
In the early 2000s, my trading buddy and I jumped into index futures. We were some of the first retail traders to plant our flag in the Russell 2000 e-mini futures market, and we actively traded the S&P 500 (SPX) and NASDAQ 100 e-minis. We traded these contracts because of leverage, insignificant theta (time value), and deep liquidity.
But 12 times a year, these markets just weren’t enough. We’d trade monthly options. When exactly? Expiration week, of course! We’d jump over to monthly options on expiration week because theta had eroded during the previous three weeks, so the monthly options were cheap. And the moves in at-the-money options could sometimes be explosive, meaning they were ripe with potential opportunity.
Nowadays, every week is like expiration week thanks to WeeklysSM options, offered by the Chicago Board Options Exchange (CBOE). They’re structured much like monthly options, but they exist only for about a week. New Weeklys are typically introduced every Thursday and expire eight days later on Friday.
Trading in Weeklys is booming. According to the CBOE, about 30% of all options volume in the SPX—the S&P 500 cash index—is done with Weeklys. I’ve heard estimates from options traders that about 35% of options volume is of the weekly variety. So, why all the popularity?
In addition to the reasons my buddy and I traded what were essentially weekly options back in the day, some traders are drawn to the official Weeklys options markets because they’re looking for potential trading opportunities around corporate earnings releases. With risk defined by the premium paid, large moves in an underlying stock after earnings can result in potentially significant profits in long Weeklys options trades. At least, that’s what these option traders are going for; of course, there are no guarantees, as significant losses could also result.
Other traders take the other side of the earnings-linked options play by selling straddles and strangles around earnings as a means of trying to capitalize on the volatility crush following an earnings release and company conference calls that sometimes deliver forward-looking guidance for upcoming quarters. Some traders sell covered calls using Weeklys. In other words, this veritable strategy buffet has drawn long lines for traders looking for flexibility.
In fact, Investools wants to teach you more about the risks and strategies that come with using Weeklys.
Weekly options are available on indices like the SPX, exchange-traded funds (ETFs), and individual stocks. The CBOE maintains a list of available Weeklys.
Along with the potential benefits of Weeklys options, it's equally important to understand the potential risks before the taking the plunge. Because of their short shelf life, Weeklys options positions require close monitoring, as they can be subject to significant volatility. Profits can disappear quickly and can even turn into losses with a very small movement of the underlying asset.
You can also find a list of weekly options on the thinkorswim® platform from TD Ameritrade (figure 1).
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Spreads, Straddles, and other multiple-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.
TD Ameritrade, Inc. and Investools Inc. are separate but affiliated companies that are not responsible for each other’s services or policies.
Investools does not provide financial advice and is not in the business of transacting trades.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2018 TD Ameritrade.