Option Trades with an “Irresistible” Edge

05/08/2012 9:30 am EST


Bill Luby of VIX and More explains why traders who prefer selling options can gain an “irresistible” mathematical edge by using weekly options instead of the more traditional, longer-term products.

When the Chicago Board Options Exchange (CBOE) made a push to expand interest in weekly options about two years ago, their efforts were initially met with a fair degree of skepticism. Over time, however, weekly options have found a dedicated following, with the CBOE “weeklys” growing from 1% of total volume to about 15% today.

Two years ago, there were a handful of index weeklys, as well as a handful of weekly options based on exchange traded products (ETPs) and individual stocks. The list of weekly options changes every week, but the current list of weeklys now includes options on many indexes, ETFs, and individual stocks. What was once a curiosity is now a groundswell.

See related: 3 Great Ways to Use Weekly Options

Personally, I have found quite a few uses for weekly options. On Tuesday, for instance, I tweeted that the VXX 18/19 call spreads had the same price for the weekly options as next month’s standard May 19 expiration.

Part of the appeal of the weeklys can be seen in the graphic below of the skew in Amazon.com (AMZN), where the April 27 weeklys (red line) had a huge implied volatility (and therefore, price) premium to their counterparts with more distant maturities.

Looking at the graphic below, one can see that it was not that difficult to construct positions with weekly options (which also included the May 4 options, shown with a yellow line) in which one leg had implied volatility that was 50-100% higher than another leg.

If you have a bias toward selling options, as I do, this can sometimes offer up an irresistible mathematical edge.

Click to Enlarge

Lately, when I find myself editing my various watch lists, one of the first things I check for is whether the underlying in question has weekly options. If you have weeklys, you are in the big leagues, and there are so many more trading opportunities.

With Zynga (ZNGA) weekly options being added last week, for instance, the ease and flexibility of trading this issue around the recent earnings report was dramatically improved.

If you haven’t tried weekly options yet, you are missing out. And if you think the volumes are too small and the markets are too thin, think again! An excellent source of information for all things related to weekly options is found on the CBOE weeklys splash page.

By Bill Luby of VIX and More

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