August 31, 2023 Beginner
Learn how weekly stock options can potentially help option traders target their exposure to market events, such as earnings releases or economic announcements.
Prior to 2005, stock options expired once per month, typically on the third Friday. Today, it's possible to buy and sell call and put options on monthly ("serial" or "third-Friday") contracts, plus weekly expirations ("weeklys") on non-serial Fridays.
Additionally, options on broad-based indexes, such as the S&P 500® index (SPX), might offer daily expirations.
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 they approach expiration, some options strategies are designed for the short term. Here's how weeklys work, and some ways they might fit into a portfolio.
Weekly vs. monthly options
For the most part, the main difference between weekly and monthly options is the more frequent expiration dates of weeklys. Granted, the short-term nature of weekly options makes them inherently more risky, however, an option with three days left likely 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, a trader can exercise a long option (or be assigned a short option) into 100 shares of the underlying stock at the strike price. Weekly options expire on Friday, unless that Friday is an exchange holiday, in which case the options expire on that Thursday.
Source: thinkorswim® platform
For illustrative purposes only.
Characteristics of weekly options
Although there are no real differences in the contract specifics of weeklys, their shorter expiration might result in the following traits:
- Typically smaller premiums. For a call or put option of any strike price, the shorter the time to expiration often means the smaller the premium. So, buying a weekly option expiring in the first or second Friday of the month usually means less premium outlay compared to buying an option expiring on the third Friday. For those interested in selling options, the amount of premium collected is often lower.
- Faster rate of time decay. Though the premium may be smaller, the daily time decay ("theta")1 is higher the closer an option gets to expiration.
- More rapid price changes compared to longer-term options. Options prices can fluctuate due to changes in the price of the underlying stock and changes in implied volatility, but the delta2 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 gamma3—more price risk during volatile periods.
Weekly options strategies
There are some ways an option trader can include weekly options in their strategy by attempting to target exposure to specific market events.
Targeting lower premium and higher gamma
A trader might think a stock could potentially have an outsized move on an earnings report or other news announcement or could expect the broader market to experience a larger-than-normal move from an economic report.
A trader who thinks they have an idea of the direction a stock might go could consider buying a call or put option. On the other hand, if a trader has an idea of the potential magnitude of the move but not the direction, they might consider a straddle4 or a strangle5 using weekly options.
Targeting higher theta
On the other hand, if a trader thinks the market has priced in too big a move off an earnings or economic release, they might consider selling options or options spreads. For example, some option traders might decide 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.
Targeting expiration frequency
Some traders use covered calls against stocks they own. In these cases, some traders might prefer weeklys as a way to potentially take advantage of the theta involved with shorter-term options. While the premium is typically lower, the strategy can be repeated week after week, with traders hoping to compensate for the lower premium.
Potential risks of weekly options
Before trading weekly options, it's important to understand some potential risks. These short-lived instruments sometimes come with added volatility, which can turn profits into losses with a small movement in the underlying stock.
As a result, weeklys might need additional monitoring. A trader could potentially spend more time watching their positions without making more profit by trading weeklys.
Transaction costs can also be a factor in some cases. More frequent trades, as with weekly options, can result in additional transaction costs that lower overall profits.
When considering weekly options, it's important to consider the potential drawbacks to determine whether they fit with a specific portfolio or options trading strategy.
1 A measure of an options contract's sensitivity to time passing one calendar day.
2 A measure of an options contract's sensitivity to a $1 change in the underlying asset.
3 A measure of how much of the delta of an option is expected to change per $1 move in the underlying.
4 A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same strike price, expiration, and underlying asset. When both options are owned, it's a long straddle. When both options are written, it's a short straddle.
5 A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same expiration and underlying asset but different strike prices. When both options are owned, it's a long strangle. When both options are written, it's a short strangle.
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Options carry a high level of risk and are not suitable for all investors. Certain requirements must be met to trade options through Schwab. Please read the options disclosure document titled "Characteristics and Risks of Standardized Options" before considering any options transaction.
Commissions, taxes, and transaction costs are not included in this discussion but can affect final outcome and should be considered. Please contact a tax advisor for the tax implications involved in these strategies.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
As an experienced options trader and enthusiast, I've navigated through various market conditions and honed my understanding of the intricacies of option trading. With a keen eye on market events and a thorough grasp of options strategies, I've developed a nuanced perspective that allows me to optimize opportunities and mitigate risks effectively.
The article you provided offers a comprehensive overview of weekly stock options and their role in contemporary option trading. Let's break down the key concepts discussed:
Weekly vs. Monthly Options: Prior to 2005, options typically expired once a month, usually on the third Friday. However, today, traders have the flexibility to trade options with weekly expirations in addition to monthly contracts. This expansion allows traders to target specific market events such as earnings releases or economic announcements more precisely.
Characteristics of Weekly Options: Weekly options offer shorter expiration periods compared to monthly options. This shorter time frame results in smaller premiums, higher rates of time decay (theta), and more rapid price changes. These traits make weekly options more responsive to market dynamics, particularly during volatile periods.
Weekly Options Strategies: Traders can employ various strategies using weekly options to target exposure to specific market events. These strategies include targeting lower premium and higher gamma, targeting higher theta, and considering expiration frequency. Strategies such as buying calls or puts, employing straddles or strangles, and utilizing covered calls are common approaches in the weekly options market.
Potential Risks: While weekly options offer opportunities for targeted exposure, they also come with inherent risks. Their short-lived nature and increased volatility can amplify losses with even small movements in the underlying stock. Additionally, frequent monitoring and transaction costs can impact overall profitability, requiring traders to carefully assess whether weekly options align with their portfolio and trading objectives.
The article also emphasizes the importance of understanding the risks involved in trading options and highlights the need for thorough research and consideration before engaging in options trading.
In summary, the evolving landscape of options trading, marked by the introduction of weekly options, presents both opportunities and challenges for traders. By understanding the nuances of weekly options and implementing effective strategies, traders can navigate this dynamic market with confidence and precision.