The Go-to Strategy for Weekly Options

07/25/2012 2:26 pm EST


James Bittman

Senior Instructor, Chicago Board Options Exchange

Jim Bittman explains why spread strategies are the way to go when trading weekly options.

We’re talking about weekly option strategies with Jim Bittman to get an update on that.  So Jim, talk about weekly options.  They’ve been out for a little while now and some strategies may be traders can use.

Wow, weekly options have exploded in their popularity.  They were actually introduced by the CBOE in 2005.  We traded them only on our indexed options, but in 2010 something—I’m not sure what—motivated the rest of the industry to start listing weekly options on a whole bunch of individual stocks. So now there are over 65 underlyings that have weekly options.  They’re listed on Thursday mornings, and they trade until the following Friday afternoon.  So if you’re going to trade weeklies you’ve need to make a serious decision.  You can treat it as a pure gamble. I’m going to buy a call and a put, and I’m either going to double my money or more, or lose it. So that’s kind of the buy-and-hold approach. 

Personally, I think spreads are more appropriate, and it’s kind of a two-part spread strategy.  If I’m bearish, I’ll buy say a bear put spread, but if it starts going against me I might roll that into a different spread that increases my chances of breaking even, or losing an awful lot less than my initial investment.  So thinking about these strategies is the key to trading weeklies.

Why might somebody use a weekly spread versus a monthly spread? 

Well, weeklies are really targeted for events, and let’s face it there are a lot of events.  There are earnings reports.  There are Federal Reserve meetings.  The first Friday of every month we had the unemployment situation. So there are a lot of events, and weeklies are really good for events.  It’s a low investment up front.  You know your risk if you’re wrong.  A lot of people can live with that kind of low risk, and the profit is impressive on a percentage basis if you’re right.

Do you find that most people are using them as a hedging strategy, or as a covered call strategy, or just trading them outright for profit?

My experience has been that people are just trading them outright, but if you wanted to hedge a foreign event, like an earnings report or something like that, that would certainly be a good thing to do. 

Let’s talk about the date, or the time decay, on the weekly options.  Is it similar to a monthly option in the final week, or is it faster?  How does that work?

Well, it’s exactly the same as a monthly option in the final week, because a monthly option with a week to go is a weekly option.  Okay, but when you’ve got a three month option, you can think logically about how much I’m going to lose week-by-week through time decay. If you buy a weekly option, it happens so quickly that academically, theoretically you can do that, but it happens so quickly that I think you’ve got to think about it as an all-or-nothing situation. 

Alright, where do I find out more information about weekly options, Jim?

Well, under the education tab.  We have several archived webinars on the topic of weeklies, and on the topic of spreads, and a whole range of issues that option traders might find interesting. 

Thanks for your time.


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