How to Use Weekly Stock Options
Prior to 2005, stock options expired once per month, typically on the third Friday. Today, it's possible to buy and sell call and put options on monthly ("serial" or "third-Friday") contracts, plus weekly expirations ("weeklys") on non-serial Fridays.
Additionally, options on broad-based indexes, such as the S&P 500® index (SPX), might offer daily expirations.
Weeklys are short-term products designed to help give option traders more targeted exposure to market events, such as earnings reports and economic data releases. Plus, because the risk dynamics of options change as they approach expiration, some options strategies are designed for the short term. Here's how weeklys work, and some ways they might fit into a portfolio.
Weekly vs. monthly options
For the most part, the main difference between weekly and monthly options is the more frequent expiration dates of weeklys. Granted, the short-term nature of weekly options makes them inherently more risky, however, an option with three days left likely has the same inherent risks regardless of whether it's labeled a weekly or a serial.
Weekly options expire like the third-Friday options. Standard deliverable options have a multiplier of 100, and at any time on or before expiration, a trader can exercise a long option (or be assigned a short option) into 100 shares of the underlying stock at the strike price. Weekly options expire on Friday, unless that Friday is an exchange holiday, in which case the options expire on that Thursday.
Source: thinkorswim® platform
For illustrative purposes only.
Characteristics of weekly options
Although there are no real differences in the contract specifics of weeklys, their shorter expiration might result in the following traits:
- Typically smaller premiums. For a call or put option of any strike price, the shorter the time to expiration often means the smaller the premium. So, buying a weekly option expiring in the first or second Friday of the month usually means less premium outlay compared to buying an option expiring on the third Friday. For those interested in selling options, the amount of premium collected is often lower.
- Faster rate of time decay. Though the premium may be smaller, the daily time decay ("theta")1 is higher the closer an option gets to expiration.
- More rapid price changes compared to longer-term options. Options prices can fluctuate due to changes in the price of the underlying stock and changes in implied volatility, but the delta2 of short-term, at-the-money options tend to have a higher responsiveness to changes in the price of the underlying. In other words, these options have a higher gamma3—more price risk during volatile periods.
Weekly options strategies
There are some ways an option trader can include weekly options in their strategy by attempting to target exposure to specific market events.
Targeting lower premium and higher gamma
A trader might think a stock could potentially have an outsized move on an earnings report or other news announcement or could expect the broader market to experience a larger-than-normal move from an economic report.
A trader who thinks they have an idea of the direction a stock might go could consider buying a call or put option. On the other hand, if a trader has an idea of the potential magnitude of the move but not the direction, they might consider a straddle4 or a strangle5 using weekly options.
Targeting higher theta
On the other hand, if a trader thinks the market has priced in too big a move off an earnings or economic release, they might consider selling options or options spreads. For example, some option traders might decide to sell an iron condor (a defined-risk strategy consisting of a short vertical call spread and a short vertical put spread) around earnings reports.
Targeting expiration frequency
Some traders use covered calls against stocks they own. In these cases, some traders might prefer weeklys as a way to potentially take advantage of the theta involved with shorter-term options. While the premium is typically lower, the strategy can be repeated week after week, with traders hoping to compensate for the lower premium.
Potential risks of weekly options
Before trading weekly options, it's important to understand some potential risks. These short-lived instruments sometimes come with added volatility, which can turn profits into losses with a small movement in the underlying stock.
As a result, weeklys might need additional monitoring. A trader could potentially spend more time watching their positions without making more profit by trading weeklys.
Transaction costs can also be a factor in some cases. More frequent trades, as with weekly options, can result in additional transaction costs that lower overall profits.
When considering weekly options, it's important to consider the potential drawbacks to determine whether they fit with a specific portfolio or options trading strategy.
1 A measure of an options contract's sensitivity to time passing one calendar day.
2 A measure of an options contract's sensitivity to a $1 change in the underlying asset.
3 A measure of how much of the delta of an option is expected to change per $1 move in the underlying.
4 A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same strike price, expiration, and underlying asset. When both options are owned, it's a long straddle. When both options are written, it's a short straddle.
5 A trading position involving puts and calls on a one-to-one basis in which the puts and calls have the same expiration and underlying asset but different strike prices. When both options are owned, it's a long strangle. When both options are written, it's a short strangle.