Thinkorswim's Don Kaufman clearly defines the many benefits, as well as the risk factors, of the relatively new and increasingly popular weekly options.

Weekly options have become more and more popular with traders over the past year, and our guest today is Don Kaufman to talk about that. So Don, what are the benefits of trading weekly options?

Well, it's really about time decay. So if you have an option for one month versus an option maybe for two months, an option for one month maybe costs a dollar. So does that mean an option for two months costs $2?  Well, no, that's not the way the options work. 

Options decay in an exponential fashion. That simply means if you have an option for one month that's trading for $1, an option for two months is trading for one times the square root of two; or $1.41. 

So now think about weekly options. Weekly options give you the ability to sell option premium every single week. So an option for a month, okay, again, is trading for $1. Let's talk about an option for a week. An option for a week is trading, let's say, for $1, alright? 

Basically what you get then is four opportunities to sell premium within one month. So that exponential decay is really helping out.

Are there specific strategies for option traders that they use just in weekly options?

You can really utilize any of the option strategies. I mean, I guess that's the great part about weeklies. There's no difference between a weekly option and a standardized option other than it has expiration on a weekly basis.

The decay rate associated with those, though, is dramatically higher, but when you look at option strategies— something as simple as a covered call—why sell premium once a month when you could sell premium on a weekly basis? Again, take advantage of that increased decay.

Now trading weekly options is almost like trading options during expiration week every single week.  What are the downfalls of this?

Well, the downfalls of it: First of all, going back to floor trader days, expiration week was always the greatest week. You just couldn't wait for expiration week. Now every week is expiration week. 

As a trader, I've been around options for a long time. It's just an exciting time to trade. I'll tell you what, the downfalls of the weeklies is simply buying the decay extremely fast; (and) selling the decay extremely fast. 

So what you really get in an adverse move—meaning that you put a position on it and it moves against you to some degree—there's really very little or no time to adjust trades. 

So pretty much, you're stuck with what you've got whether you buy them or sell them, you're in it.

Initially it took off pretty quickly, and sort of having some volume with those weekly options. Has it really exploded here in the last six months?

Yes, volume has absolutely exploded in weeklies. 

The irony of the entire weeklies talk is that originally this product, the weeklies, was created by the two founders of thinkorswim, Tom Sosnoff and Scott Sheridan.

Kind of a great story behind weekly options is that when we originally brought this idea to some of the major option exchanges, they weren't called weeklies; we called them quickies…it was hysterical!