Every Week Is Expiration: Using Weekly Options to Reduce the Cost of Longer-Term Positions
Weekly options are a great way to manage risk and increase the probability of profitability.
These were initially met with both cheers and jeers. For active option traders, the prospect of being able to tweak positions down to smaller time frames was seen as a positive. For skeptics who view most new products or innovation as a further corruption of the "invest for the long term" mentality, it is just one more way for people to lose money in the increasingly casino-like atmosphere of financial markets. The truth, of course, lies somewhere in the middle and is mostly defined by how the products are used.
While there are a lot of complex and kooky products out there, I stay away from most things VIX (^VIX) related, leveraged, or inversed as I think they overcomplicate things. Weekly options are no different than "regular" options, which can be listed from approximately 30 days until expiration and typically expire on the third Friday of each month.
While the initial launch only included a handful of names, such as SPDR S&P 500 (SPY) and Google (GOOG), the number of listings is now in the hundreds and ranges from Apple (AAPL) to Zynga (ZNGA). The top names stay on the list, but some can be added or deleted on a weekly basis depending on pending news such as earnings. For a complete and current list, check out this page on the CBOE's (CBOE) website.
Keep Time on Your Side
Many people view weekly options as a vehicle to make speculative bets in which they buy what seems to be "cheap" puts or calls in the hopes of getting a high-percentage return with limited downside. I'll admit I do the same, especially when earnings are involved. But while the options might have a low notional or dollar value due to their short lifespan, they are often expensive in terms of implied volatility for the very reason that people tend to bid them up for lottery plays or buy short-term protection. For this reason I typically find weekly options to be a much better sale than purchase.
In addition to the relative expensiveness of these short-term options, they also come with the incredible tailwind -- assuming one is selling -- of accelerated time decay. Remember, theta is defined on a slope, which starts to curve downward with about 15 days until expiration and then nosedives in the final week.
I like to use weekly options to create calendar spreads in which I sell the short-term option as a way to reduce the affective purchase price of a longer-term position. Likewise, if you use buy/writes or covered calls, the weekly options can help you cram in additional expiration cycles to collect premium.
The one caveat is when there is known pending news, such as earnings or a regulatory ruling, in which case the implied volatility -- which is really just an artificial expansion of time -- remains high and keeps premiums pumped up. This needs to be addressed on a case by case basis. In fact, for longer term stock holders, using weekly options can be a very effective, time-focused, and low-cost way to ride out an impending event such as earnings.
With most of earnings season past and things expected to slow down in the final two weeks of August, having two sets of options that run from August 16 to August 24 and from August 23 to August 30 can provide some good flexibility to positioning rather than being confined to using the next "regular" options, which don't expire until September 22.
One might consider selling an iron condor on the SPYs using these weekly options on the belief the market will remain range-bound until after Labor Day. And if you think that first jobs number will be a big market mover, then the options that listed on August 30 and expire on September 7, the day of the labor report, might be a low-cost way to play.
Using weekly options to reduce the cost of a longer-term position is a great way to manage risk and increase the probability of profitability.
For more from Steve Smith, take a FREE 14-day trial to OptionSmith and get his specific options trades emailed to you along with exclusive access to his full portfolio. Learn more.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.