Quantcast
The  Pros and Cons of Buying Weekly Options

The Pros and Cons of Buying Weekly Options

Posted On September 15, 2020 2:08 pm
By:

One of the aspects I love about running the Options360 service is the member interactions I receive through live webinars and their ability to email me directly.  Members have the ability to ask me about specific positions and strategies, or general concepts. 

A recent question came from Agnes, who asked what the pros and cons of weekly options were. Weekly options were first listed in 2005. Prior to that, they only had monthly expiration dates on the third Friday of the month. To make myself feel old, there was also time — before 2001 — when options traded in fractions rather than decimals. The smallest increment was 1/16  (referred to as “teenth” or “teenie”) which equates to $0.062.  For example, the narrowest bid/ask spread would be 1/16 bid, ⅛ offer.  Now, over 80% of publicly traded stocks that have listed options also have weekly options expiring each Friday.  The term “weekly” is a bit of a misnomer as most get listed with as many as six weeks of life until expiration. 

For example, “Fastly (FSLY)” currently has traditional monthly options expiring this Friday, 9/18.  It also has “weeklies” expiring on 9/25, 10/02, 10/7, the monthly on 10/16, and another couple of weeklies on 10/23 and 10/30.  The next expiration is the monthly November 11/20. 

[Labor Day Sale Extended] Claim your SPECIAL One-Month $19 Trial Offer to the Options360 Service

The biggest benefit of weekly options is they offer flexibility to customize a trade or position to align with your trading thesis. For example, if one wants to target a short term move simply buying a weekly put or call with only a couple of days until expiration will cost significantly less than one with several weeks or months until expiration.  This gives you a tremendous amount of leverage. Without going too deep into the weeds, short-term options have a much higher gamma, or sensitivity to a price change, than longer-dated options. 

gamma strike price chart

For longer-term options strategies such as a calendar spread, in which you buy a longer-dated option and sell a similar short-dated option to reduce cost, it means you can roll the short leg each week.  This allows you to take advantage of the acceleration in theta or time decay in order to collect premium and generate income. 

In Options360 , one of my favorite options strategies the diagonal spread.  I typically buy a slightly in-the-money option with 40 -60 days until expiration while selling a weekly option. My goal is to roll or continue to sell weekly options for 3 to 4 cycles at which point the cost basis of the long option should be near zero; meaning, I now have a “free” trade.  In reality, as the stock moves, one often has to make adjustments that don’t adhere to the original plan. Having the choice of weekly options provides tremendous flexibility in making adjustments, whether that be profit taking or defensive moves to minimize losses. 

CLICK HERE for a one-month trial with these trades and more to the Options360 Service for just $19!

In that vein, note that many weekly options offer more strike prices than the monthly. Let’s return to FSLY for our example.  If you look at the options chain below, you’ll see that the weekly options that expire on October 2 have strike prices in $1 increments whereas the monthly that expires on October 16 only offer strikes in $5 increments. 

fastly inc 45 day expiration

But, this leads to one of the cons, or at least a point of frustration. Weekly options tend to lack liquidity — meaning wide bid/ask spreads, low volume, and small open interest. The FSLY option chain shows that none of the weekly 10/02 options have traded more than 50 contracts today nor any open interest of 400-plus contracts.  The bid/ask for the 85 strike calls is$ 5.50/$6.00 or $0.50 wide. By contrast, the monthly 10/16 expiration has several strikes that have traded over 300 contracts today, 1,500-plus of open interest, and the bid/ask for the 85 is $7.90/$8.10, or just $0.20 wide. 

The main drawback of weekly options is that with more expiration dates and strike prices, the market becomes fractured, resulting in a lack of liquidity, causing sizable “slippage” or a cost in execution price.  If you’re giving up $0.30 to get in and out of a $6.00 item that might be your total profit margin on a short-term trade.  And liquidity gets worse when you need it most (during market volatility increases).

On the whole, weekly options are a benefit to option traders. You must be careful not to turn them into wild speculation, or lottery tickets. For the sensible options trader, the flexibility of weekly options provides a great tool for rounding out and executing options strategies that align with your trading thesis. 

CLICK HERE for a one-month trial with these trades and more to the Options360 Service for just $19!

Tagged with:

About author

Steve Smith
Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

Related Articles

Leave a reply

Your email address will not be published. Required fields are marked *