In just a decade, it seems weekly options have become one of the most actively traded products out there. Introduced in 2005 by the CBOE for S&P 500 options as “SPX Weeklys,” the number of stocks and exchange-traded funds (ETFs) with weekly options has since expanded dramatically.
At first, weekly options were listed by the exchange on Thursdays, a week before the following Friday, so they’d have a full week of trading days. Now, some stocks have options that expire at the end of each week going out several months. That’s financial innovation in action. The exception is when the following Friday is the expiration of the “regular” options—generally the third Friday of the month.
You can see the weekly options a stock, index, or ETF might have under the Trade tab of the thinkorswim® platform by TD Ameritrade. Type in the stock symbol and look for the weekly expirations in the Option Chain. You’ll see the word “Weeklys” on the left-hand side (Figure 1).
So Why Trade Weeklys?
Consider options that have a few days to expiration. When the number of days drops, and the option price also drops the option’s theta and gamma will change.
As you can see in Figure 2, on the Trade page of thinkorswim, the prices of options with five days to expiration are lower than the options at the same strike with 33 days left. Also, the gamma of the weekly option with five days to expiration is larger than the gamma of the weekly option at the same strike price with 33 days. (Remember, gamma is how much the delta of an option changes when the underlying stock moves up or down $1.)
What’s the real impact of all this?
Look at the deltas of the 97.5 call and 98.5 call in the options with five and 33 days to expiration (DTE). If the stock price moves up $1, you could estimate that the 98.5 call could have the delta of the 97.5 call. In the five DTE calls, the 97.5 call has a 0.57 delta, and the 98.5 call has a 0.40 delta. That’s a 0.17 difference (just what the gamma suggests). In the 33 DTE calls, the 97.5 call has a 0.54 delta, and the 98.5 call has a 0.47 delta. That’s only a 0.07 difference. This means the delta of the five DTE call is more sensitive to a change in the stock price. So, if you’re making a short-term speculation that the stock’s price might go up, the call with fewer DTE could respond to that rally more strongly than the call with more DTE. In other words, it’s a more aggressive bet.
In exchange for that high gamma, take a look at the theta (time decay). The theta of the option with five DTE is more than twice the theta of the option with 33 DTE. That means each day the stock doesn’t move the way you want it to, it’ll cost that option with fewer DTE a lot more in decay.
How To Trade 'Em
Earnings trade. The first possible use of weekly options with fewer DTE is as a market-neutral trade ahead of an earnings announcement. A weekly option’s high theta (time decay) with fewer DTE, which can work against a trader buying that option, can work in favor of a trader who’s selling that option short. Of course, with fewer DTE, an option’s price is lower than an option with more DTE, all things being equal. But that option’s implied volatility could be higher ahead of an earnings announcement. That higher implied vol can push up the weekly option’s price.
Rather than make a bullish or bearish speculation on a stock price after earnings, consider a neutral strategy, like a short strangle (short out-of-the-money put and short out-of-the-money call) in weekly options that expire just past the announcement. The short strangle could take ad- vantage of higher option prices and theta, and is a speculation that the stock’s price won’t move below the short put's strike, or above the short call's strike.
On the other hand, a short strangle has unlimited risk regardless of which way the stock ends up moving, and you may not want to take that risk ahead of a big announcement. Along with high positive theta, a short strangles's high negative gamma means the position's delta risk could grow quickly if the stock either rallies or drops. But don’t give up on the weekly option just yet.
Instead of using a naked short strangle, you could consider an iron condor in the weekly options. The iron condor has defined risk, but still has positive time decay, and is a speculation that the stock price will stay between the options’ strike prices, just like the short strangle.
Say XYZ is at $75 and has an earnings announcement three days out on the upcoming Friday. You think it might not move below $72 or above $78. Here, a short strangle with undefined risk would be short the 72 put and short the 78 call in the weekly options that expire that same Friday. But a defined-risk iron condor would be long the 70 put, short the 72 put, short the 78 call, and long the 80 call in the weeklys. If you sold the iron condor for an $0.80 credit, its max risk would be $120, and would occur if XYZ either went below $70 or above $80 at the options’ expiration.
Short-term protection. A second possible application of weekly options is a short-term hedge—think buying a put to hedge long stock—against upcoming news. Here, buying a weekly option with an expiration just after the news takes advantage of a lower price and higher gamma.
Look again at the options in Figure 2. You might estimate that the 97.5 put will have a price close to the current price of the 98.5 put if the stock drops $1. Let’s say you bought the 97.5 put with 33 DTE for $2.05. Then news came out, the stock dropped $1, and the 97.5 put was worth $2.53 (the current price of the 98.5 put with 33 DTE). That’s about a 23% increase. But now let’s assume you bought the 97.5 put with five DTE for $0.69, the stock fell $1, and the 97.5 put was worth $1.17 (the listed price of the 98.5 put). That’s a 69.5% increase. If you’re protecting long shares of stock against a price drop, the weekly with fewer DTE may have a larger percent increase for a given investment in the hedge. The down- side, of course, is that time decay is working against the long put with five DTE. And if the stock doesn’t drop in five days, your hedge could expire worthless, and you’d have to buy another put in the next weekly, or further expiration. That drives up costs and commissions. But weekly options can be effective short-term hedges.
Trading time, not direction. A third application is a long calendar spread, where you’re shorting a weekly option with fewer DTE, and buying an option at a further expiration at the same strike. The speculation is that the stock price will be close to the strike price of the calendar spread at the expiration of the short option, where the long calendar can maximize its profit. The max risk of a long calendar is the debit paid.
Selling a weekly option as part of a long calendar takes advantage of potentially higher positive time decay than an option with more DTE. Now, you can see that the actual premium you’re selling that weekly option for is lower than an option with more DTE. But here’s where the weekly options that have more than seven DTE come in handy when they’re available.
Because time decay isn’t linear—it gets higher faster as expiration approaches—you could choose one of the weekly options that might not have the high- est time decay, but has a higher premium. Because rolling the short option is a key part of the long calendar strategy, there could be a lot more rolling of trades with weekly options. Yes, that can increase the total potential credit from the rolls. But it could also increase commissions.
The bottom line? Weekly options have a short life span that can bring flexibility to your existing strategies.