Options, Weekly Options, and Now ‘Extended’ Weekly Options
Options can be a great tool for mitigating price risk of an asset such as a stock or a commodity future.
Unfortunately, much of the time it seems as though options are misunderstood. In actuality they are not as complicated as they sound. In fact, they can be quite simple.
One must remember that this type of trading vehicle simply grants the buyer the right but not the obligation to be long or short an underlying asset at a certain date in the future.
This holds true for monthly options, weekly options, as well as the newest kid on the block – ‘extended’ weekly options.
What Are Extended Weekly Options And How Are They Used?
When most investors think of an options contract, they think of monthly calls and puts that expire on the third Friday of the month. These have been around for a very long time.
Recently, ‘weekly options’ were introduced which were issued on a weekly basis and had a life span of 7 days.
These proved to be very popular. So popular in fact, that the exchanges decided to expand on the idea and create an ‘extended’ version of this trading tool.
What are ‘Extended’ Weekly Options?
The extended weeklies are exactly as they sound – they are a series of weekly options that have been extended throughout the month.
To break this down further, each week of the month will now have an expiration.
Typically these are listed the Thursday or Friday before the expiration date which is on the following Friday, and are listed for week one, week two and week four.
Certain months may see them listed for weeks one, two, four, and five.
It is worth noting that these contracts are not listed for the regular monthly option expiration week or for serial expiration dates. Different exchanges may have different rules regarding the listing of weekly options, and different securities may also have different rules.
Of course if one is considering the use of these, it is imperative that the necessary research be done beforehand.
How Are These Types Of Trading Contracts Used?
Like any type of option, weeklies may be used to mitigate price risk in an underlying asset, speculate on a large move in a stock or commodity future, or as a tool to earn income through premium selling strategies.
One popular example of a way to use them is with earnings announcement plays. Speculators may buy short dated calls or puts on a stock depending upon their outlook and look to profit from a large directional move in the stock.
On the other hand, premium collectors may look to sell them for income due to their short life span and high theta decay rate.
For an investor who has a position in a stock, weekly options may be a good,inexpensive way to hedge market exposure.
What Are Some Of The Advantages And Disadvantages of Weekly Options?
The pluses and minuses of this type of trading contract largely depend on what an investor’s intended use may be.
That being said, as a general rule of thumb these contracts will be cheaper than options with more time until expiration. This can help limit loss potential on a position.
In addition, if one is looking to hedge against a specific event such as earnings or an economic report, weeklies can provide a cost effective tool to do so.
On the flip side however, is the fact that an out of the money weekly option may require very significant market movement in order to turn a profit for a buyer. The time decay rate is very high on these options and must be accounted for.
From a premium collector’s point of view, the shorter term one week contracts may not garner enough premium to be worth the risk of selling and an option writer may get a better risk versus reward by using options with more time value.