Weekly Options
Hello, my name is Brian Overby. I am the Senior Options Analyst at TradeKing, and author of The Options Playbook. Today I want to talk about weekly options. Weekly options haven’t been around as long as standardized option contracts, and they are becoming very popular in a hurry. What we’ve noticed actually, from data from the Chicago Board of Option Exchange website is that out of almost all the option volume that is out there, about 10 percent of that volume is being generated in just the weekly options alone. So since that is such a hot topic, I thought I would address weekly options and some of the benefits and detriments to trading them.
So if I look at weekly options, first of all it’s important to note that not all underlyings that trade options will have weeklies on them. Right now, from this taping, there are just under 100 underlyings, and that includes indexes and stocks that actually trade weekly options.
Now, because weekly options are adding another class of option to option trading, we usually only choose very popular underlyings, underlying stocks that have a lot of volume in them in general, so we’re talking about IBM, Yahoo, some of these very popular stocks usually will have weekly options that trade on them.
What exactly is a weekly? Well, it’s pretty well named in that these options usually have about one week of life. Most of them will start trading on Friday, and the last day to trade them will be that following Friday so basically they have six business days as far as trading is concerned. means is that option value when that underlying gets in-the-money will start acting like the stock, in other words, move one-for-one with that underlying stock movement very, very fast. So what does that mean? That means that if I’m right and I’m selling option contracts, the options will expire at a very rapid rate and I can be very profitable quickly by doing my weekly option contracts. What’s the downside? When it goes against me, that really hurts my position, and it hurts my position very fast with weekly options.
Also important to note is that the rules between indexes and stocks and all these different underlyings might change, so you always want to be able to understand exactly when that option is going to stop trading, and when it’s going to start trading, so don’t always just assume the standard format when it comes to trading weekly options.
Now, is there any difference between a weekly option and a standardized option, as far as pricing is concerned, etcetera, etcetera? No. In general, the same fundamentals that are used to price standard options by market makers down on the trading floor are also used for weekly options.
What are some of the benefits and some of the detriments to trading these? Well, one big thing about weekly options, and this is where some people that like to sell covered calls kind of like the concept, is that short life span. As far as the option is concerned, if you ever look at options as expiration approaches, the time value of out-of-the-money options contracts can decay at an accelerated rate as that expiration date, or that final trading day is approaching. So you look at a graph of time decay and you kind of see r-r-r-r-r-r, and at the very end we see a high rate of decay. So covered call writers, a lot of them that own stock and like to sell calls against it, like to do it in underlyings that actually have weeklies because they like to have this very short, rapid expiration date that’s approaching.
Now, here’s one of the downsides, a lot of people that actually can sell calls that are selling weekly options in different types of spreads, like short call spreads, short put spreads, and where you don’t own the underlying, is if the stock becomes in-the-money and I have a short expiration, you pick up Deltas very quickly. We’ve already done a video on Deltas, but what this
So the good news/bad news overall in this is that when I’m correct on my forecast weeklies can give me a lot of benefit, but the bad news is when I’m wrong on my forecast weeklies can hurt me in a hurry. So if you understand these risks and rewards of trading weekly options, you might want to try them out.
My name is Brian Overby. I am the Senior Options Analyst at TradeKing, and author of The Options Playbook. If you’d like to learn more about investing, please check out our education center on www.tradeking.com, the companion website for my book, optionsplaybook.com, and our Trader Network, where investors connect to share ideas and strategies for trading stocks, options and more.
Hello, my name is Brian Overby. I am the Senior Options Analyst at TradeKing, and author of The Options Playbook. Today I want to talk about weekly options. Weekly options haven’t been around as long as standardized option contracts, and they are becoming very popular in a hurry. What we’ve noticed actually, from data from the Chicago Board of Option Exchange website is that out of almost all the option volume that is out there, about 10 percent of that volume is being generated in just the weekly options alone. So since that is such a hot topic, I thought I would address weekly options and some of the benefits and detriments to trading them.
So if I look at weekly options, first of all it’s important to note that not all underlyings that trade options will have weeklies on them. Right now, from this taping, there are just under 100 underlyings, and that includes indexes and stocks that actually trade weekly options.
Now, because weekly options are adding another class of option to option trading, we usually only choose very popular underlyings, underlying stocks that have a lot of volume in them in general, so we’re talking about IBM, Yahoo, some of these very popular stocks usually will have weekly options that trade on them.
What exactly is a weekly? Well, it’s pretty well named in that these options usually have about one week of life. Most of them will start trading on Friday, and the last day to trade them will be that following Friday so basically they have six business days as far as trading is concerned. means is that option value when that underlying gets in-the-money will start acting like the stock, in other words, move one-for-one with that underlying stock movement very, very fast. So what does that mean? That means that if I’m right and I’m selling option contracts, the options will expire at a very rapid rate and I can be very profitable quickly by doing my weekly option contracts. What’s the downside? When it goes against me, that really hurts my position, and it hurts my position very fast with weekly options.
Also important to note is that the rules between indexes and stocks and all these different underlyings might change, so you always want to be able to understand exactly when that option is going to stop trading, and when it’s going to start trading, so don’t always just assume the standard format when it comes to trading weekly options.
Now, is there any difference between a weekly option and a standardized option, as far as pricing is concerned, etcetera, etcetera? No. In general, the same fundamentals that are used to price standard options by market makers down on the trading floor are also used for weekly options.
What are some of the benefits and some of the detriments to trading these? Well, one big thing about weekly options, and this is where some people that like to sell covered calls kind of like the concept, is that short life span. As far as the option is concerned, if you ever look at options as expiration approaches, the time value of out-of-the-money options contracts can decay at an accelerated rate as that expiration date, or that final trading day is approaching. So you look at a graph of time decay and you kind of see r-r-r-r-r-r, and at the very end we see a high rate of decay. So covered call writers, a lot of them that own stock and like to sell calls against it, like to do it in underlyings that actually have weeklies because they like to have this very short, rapid expiration date that’s approaching.
Now, here’s one of the downsides, a lot of people that actually can sell calls that are selling weekly options in different types of spreads, like short call spreads, short put spreads, and where you don’t own the underlying, is if the stock becomes in-the-money and I have a short expiration, you pick up Deltas very quickly. We’ve already done a video on Deltas, but what this
So the good news/bad news overall in this is that when I’m correct on my forecast weeklies can give me a lot of benefit, but the bad news is when I’m wrong on my forecast weeklies can hurt me in a hurry. So if you understand these risks and rewards of trading weekly options, you might want to try them out.
My name is Brian Overby. I am the Senior Options Analyst at TradeKing, and author of The Options Playbook. If you’d like to learn more about investing, please check out our education center on www.tradeking.com, the companion website for my book, optionsplaybook.com, and our Trader Network, where investors connect to share ideas and strategies for trading stocks, options and more.
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