I pride myself on helping others out with the type of language that is not convoluted and filled with financial jargon. The jargon that so often confuses the common man and makes him fear the stock market. You’ll see no use of thetas, betas, gammas or any confounding Greek symbols.
My theories rely solely on common sense and practical applications.
Today’s lesson will be to discuss a fairly new concept in the stock market. Weekly Options.
Weekly options were introduced into the stock market by the CBOE (Chicago Board Options Exchange) in order to further capitalize on increased options volume trading in the past couple of years. Looking at weekly options from a market maker’s perspective, it’s a no-brainer for pulling in even more commissions from millions of market participants.
A highly subscribed new derivative equals SICK fees and commissions for all brokers!
And to say that weekly options are highly subscribed is a freaking understatement because the volumes seen on contracts traded with weekly options many times EXCEEDS the volume traded now on the regular monthly options.
We have used Bank of America (BAC) in all of our previous examples so we’ll continue to use it for this series.
The above chart shows the last month in the price action of BAC. Vertical lines have been drawn to show you the expiration days of these newly created weekly options. A weekly option now has a life of 7 trading days. New weeklies are added every Thursday for the following week. Here are the March weeklies expiring next week for BAC…
You may be asking yourself, why are there two different options for each strike price? That’s because in most options chains you see today they show the current weekly option and the regular monthly option. Take notice of the difference in the option values and the open interest between the weekly vs. the monthly. For example, let’s take a look at the $14 Call. The weekly option has a current value of $.30 and about 3000 contracts open, while the monthly $14 has a value of $.39 with over 175K contracts traded. Now, considering time premiums the monthly is obviously more expensive because it has another week left before expiration. The weekly has literally just been opened for trading this past Thursday so that is why your open interest is lower but take a look at the volume for the day. This shows the number of contracts that were traded in the last trading day and you can see they’re pretty similar, the weekly traded about 6K while the monthly traded about 10K.
If you are a short-term trader, choosing which option to go with for a certain trade can be a crucial decision. I’ve compiled a list of things to keep in mind if you decide to play the weeklies in the future. Keep in mind, these are things I’ve picked up from experience and simply from just trading these on a daily basis. My specific strategy relies solely on simple vanilla plays such as buying naked calls/puts. This post will stay in line with that particular strategy while future posts will look to explore other strategies.
- Time premiums erode EXTRA fast with weekly options in general.
- Buying next week’s weekly options before the weekend is dangerous because you immediately lose those two days of premium even though the market is not active during the weekend.
- If you expect a gap up or down in a stock the next day, playing weeklies can be much more advantageous than the monthlies.
- Weeklies should generally be used to play a move that you expect to happen immediately and not to be held overnight. Overnight holds in a weekly option can really kill you because again everything is about sentiment. If there is a chance your move will not happen, your weekly will dwindle in value MUCH quicker than a monthly option would.
- Thursdays and Fridays are generally ideal times to play weeklies. It is not at all surprising that it is also a risky time to play them. The percentage gainers are sometimes enormous if you can time your entry when a stock is about to make a major move.
- Lastly, weeklies are freaking bananas, so grab ya ballz. There is no rationality towards the pricing of a weekly, none whatsoever. The sooner you accept that, the better off you will be.
Since the advent of weeklies for many stocks, the options market has changed a great deal in my opinion. Monthly options premiums are now generally much higher than they were before. Prior to the addition of weekly options, OPEX days (options expiration on the 3rd Fridays) were always pretty crazy. Now, the action has moved away from the 3rd Friday towards the weekly expirations. Weeklies have also caused outrageous pricing inconsistencies. The pricing of options is totally irrational. Anyone who uses mathematical models to price options or to plot out expected future values of those same options has no clue what’s going on in this market.
For the newbie traders, I would recommend paper trading these options before using real money so you can get a feel for how they move in conjunction with the underlying stock prices.
Selling, or writing, these weekly options has also become a lucrative game as well for the investor who is strapped with plenty of capital. We’ll examine more about weekly options as we continue this series further!
Let me know of further topics you would like me to discuss here and as always, stick with Lucci!