New Option Trading Choices Are on the Way

10/04/2010 10:50 am EST


First it was monthly options. Then came weekly options expiration dates. If there is a way to bet on it, Wall Street will figure out a way to butcher it further it seems. Soon, the options world may get to digest daily options expiration dates. Really? Yes, really.

The Wall Street Journal reported on Wednesday (September 29) of an August 24 filing from the Chicago Board Options Exchange parent CBOE Holdings, Inc. (CBOE), which sought regulatory approval to offer daily options.

Clearly, the exchange must be happy enough with weekly options expiration trading volume to decide that this is attractive. If the “weeklies” were a flop, it would not likely want to go after an even shorter expiration. Opinions still vary on options that expire weekly, and most retail investors still have a hard enough time understanding monthly expiration dates and proper options strategies. In other words, these daily options may not be for dummies.

Forming an opinion ahead of time here on a daily expiration is more than difficult. The pros and cons are numerous. Lower premiums based upon time value is attractive, in theory, but pricing these options may prove extremely tricky. Pricing options and event risk in biotech, for instance, is often considered more alchemy than science when it comes to FDA PDUFA dates on speculative biotech companies. Imagine having daily options around an FDA ruling, where trading a biotech is halted all day.

An obvious goal would be to use daily options to hedge overnight and weekend risk along with special event risk. A problem is that the public may find that this is a difficult and extremely risky method of trading. The old mantra from most brokers’ Series 7 studies is that more than 90% of all options expire worthless. Imagine if this would be true every single day rather than just weekly and monthly.

Alternatives to stock investing are not new. Weekly stock options were preceded by single-stock futures, and now, daily options may be next, so stay tuned.

In the meantime, more weeklies are coming.

Data and opinion on just how successful the new weekly stock and index options are is still a work in progress. Opinion aside, the recent CBOE Holdings (CBOE) move to introduce weekly stock options in addition to regular “old-way” options that expire on the third Friday of each month is about to get some competition.

CME Group (CME) has announced the launch of Nasdaq 100 weekly options. These won’t start trading immediately, however, (the press release is saying they will start on October 18, 2010) and will be listed with CME rules and regulations.

The Nasdaq 100 weekly options will expand the number of expirations with more trading opportunities and increased position management. The difference here is that these standard and E-mini weekly options will be “European style,” which translates to the “bet” being where the price will be at the close of trading on expiration date rather than during the time frame of “anytime between now and expiration date.”

A weekly expiration will be available for every Friday of the contract month except for the third Friday, as this is the same week as traditional “American-style” expiration day.

This is not the only “new” weekly option news. The CBOE just launched on September 28, 2010 a new weekly options series covering the VIX, or CBOE volatility index.

Weekly options seem to be a mix between the traditional monthly expiration options and a synthetic options market. We still have a very short operating history on these as well and that makes judging the long-term success of these more of a work in progress.

It is hard to discuss the idea of weekly options without drawing a comparison to single stock futures. OneChicago is an all-electronic exchange for trading single stock futures that was founded in 2002, and it had much of the same goal: Making trading access cheaper than buying the underlying security. Having a weekly expiration makes buying options cheaper than buying monthly options, at least in theory, because of less time value. Afterall, there are never more than five days to expiration.

Leave it to Wall Street and the mathematicians. Even with all the new financial regulations passed, and those still pending, Wall Street will always figure out a way to dice things up and trade on it.

By the Staff at

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