Key Benefits of Weekly Options

09/19/2011 4:19 pm EST


Don Kaufman

Co-Founder, TheoTrade

Don Kaufman of thinkorswim explains why retail traders may want to consider trading weekly options, which are gaining in popularity and allow for more windows of opportunity in the markets.

Taking a look at weekly options with Don Kaufman. Don, great to see you. Let’s talk about weekly options. What’s the allure?

The allure of weekly options. Well, obviously, expiration in options has always been a really exciting time. Options are really achieving their highest decay rate during that expiration week, which can kind of be a double-edged sword whether you’re buying options or selling options, but weeklies really bring that expiration cycle every week.

So, Don, every week you have this event. I don’t understand how it is advantageous.

Well, again, if you want to go out and trade options, options provide you leverage. So now you have an option that only exists ultimately for a week, which can create relatively inexpensive options whether you’re buying them or selling them. It’s really advantageous for any retail trader.

Can you roll them over and over?

That’s exactly what you look at doing. So, again, when you think about weekly options, it’s the most exciting time in an option’s life cycle right at that expiration.

All the weeklies did is bring that excitement so every single week now is expiration week. It really affords us that great amount of decay that you see in options.

See video: Trade Options Expiration Like the Pros

There’s kind of a great story behind the weekly option, and originally, the co-founders of thinkorswim, which were Tom Sosnoff and Scott Sheridan, they came up with the weekly product.

That’s a product they came up with years and years ago. They kind of promoted it for a while, and ultimately, that idea eventually surfaced on the exchange level.

We have, of course, presented it to them, and I guess the best part of this story is that it wasn’t originally called a weekly. We called the options “quickies.” The marketing department said some of the exchanges didn’t think that was quite okay, and we settled on weeklies, and the volume has exploded at thinkorswim at TD Ameritrade.

Can you walk me through an example?

An example of a weekly option. The easiest thing to think about with the weekly option is, we’ll start with a monthly option, a regular expiration. You buy a stock and you sell a call. Typically, that call decays for an entire month.

Well, time decay accelerates the closer you come to expiration. So, it’s most advantageous if you were to sell an option on a shorter-dated basis.

Again, traders have only been able to do that with monthly options. Now they’re afforded the ability to sell an option on a weekly basis and really reap the statistical benefits of time decay in a much shorter time fashion.

And you can still limit your risk with these, too?

Absolutely, one of the greatest things about the weeklies is you can trade a weekly against a monthly option, against an option that’s six months out.

So, for risk management, you can still go out and buy a stock. You can turn around and buy puts a couple months out, (or) a month out. It’s really up to the trader, and then sell options on a weekly basis—calls—to finance the cost of some of those puts.

So, in terms of risk management, in terms of trading, it just provides that much more flexibility than we had before.

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