When Should You Trade Weekly Options?

06/17/2013 7:00 am EST

Focus: OPTIONS

One of the biggest changes in recent years has been the advent and growth of weekly options on the major option exchanges, and option trader Joshua Belanger of OptionSizzle.com details four great ways to use these versatile instruments.

Weekly options trading is fairly intuitive. The list of weekly options are listed every Thursday, and they expire the following Friday. Weekly options are available on all the usual stocks and indexes, such as the S&P 500 Index (SPX), along with the major exchange-traded funds (ETFs), such as the financial SPDR Select (XLF).

Weekly options are also available on some of the most widely traded equities such as, includes Apple Inc. (AAPL), Exxon Mobile Inc. (XOM), and JPMorgan Chase & Co. (JPM). The list of stocks and futures that are traded regularly change. Information with regard to availability is listed on the CBOE web site.

Weekly Options Tips

  • Trade weekly options when you are looking for a short-term movement in a financial instrument.

Trading weekly options have many benefits. The options have a shorter duration than standard options which expire every third Friday of the month. Shorter-dated options will cost less than longer-dated options because there is less time value, which generally drives up the price of an option. You should trade weekly options when you are looking for short-term movements in a market.

  • Use weekly options to take advantage of volatility around an economic event or earnings release.

Weekly options can be specifically valuable around economic data releases or earnings releases. Because you can keep your premium to a minimum, there's probably no better way to maximize the power of leverage within the generic options arena.

  • Trade weekly options when you need to hedge your portfolio.

If you have a portfolio of stocks and options, you might be able to offset some of your exposure with weekly options. You can purchase insurance or short-term protection for your stocks. The cost will be low than standard options with more than a week to expiry. Additionally, to hedge your exposure to the market, you can purchase weekly puts on the major indices to offset potential losses on your portfolio.

You can also sell covered calls on weeklys. Although the income you receive will be less than a longer-term option, your waiting time until expiration will be a lot shorter.

Weekly Options Specifications

The Chicago Board of Options Exchange offers three different types of weekly options, along with weekly settlement data and volume/open interest information. Some of the options they offer have morning settlements while others offer PM settlement.

Weekly options are traded using American-style exercise features, which make then exercisable at any point prior to the expiration date. On expiration, the buyer has the right but not the obligation to receive the underlying instrument. Liquidity on weekly options is also robust.

By Joshua Belanger, Founder, OptionSizzle.com

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