As a whole, options trading has been an active area in the stock market since 1972. Several investors and traders choose to take the options route as it is commonly known to provide greater rewards with the amount of money or capital that is invested. All of the transactions for options trading were made easy. Further, with time, options contracts came with standardized terms. A few decades after, the concept of weekly options was introduced. Weekly options are similar to the standard options in a few ways. In this article, we will have a look at weekly options and understand more about their advantages as well as disadvantages.
What is Weekly Options?
Weekly options are basically short-term options that generally have the same product specifications as the standard options or options contracts that are listed on a particular product. They behave exactly like monthly options except that they exist only for eight days. Certain products list weekly options with nearly up to five consecutive weekly expirations given that the weekly listings don’t expire on the same date as that of the expiry date that is listed on the monthly contract.
Usually, weekly options are introduced every Thursday and they become active after which they expire eight days after on a Friday. Typically, investors get to experience 12 monthly expirations in a year. With weekly options trading, investors have an option to experience fifty-two expiration each and every year. So, instead of drawing profits twelve times a year, you will be in a much more favourable position to draw profits fifty-two times a year. Typically, any strategy that can be implemented on longer-dated options can be implemented on weekly options. When it comes to premium sellers who would like to take advantage of the time decay curve that is rapidly accelerating, weekly options trading can be the best bet.
Characteristics of Weekly Options
While the majority of the functioning of weekly options are similar to that of standard options contracts, there are a few factors that make weekly options stand out. Let us have a look at the three main characteristics of weekly options.
- Smaller Premiums
Be it a put option or a call option having any strike price, the one rule that applies to both is that the premium is smaller if the time to expiration is shorter. So, purchasing a weekly option that would expire sometime during the first or second Friday of the month would mean that you have to pay a lesser premium. Relatively, if you buy a weekly option that expired on the third Friday of the month, it can be comparatively expensive. However, if you are planning to sell options, then the amount of premium that you could potentially collect would be lower.
- Faster Time Decay Rate
While the premium may be smaller, the time decay of weekly options on a daily basis is higher. It continues to become higher the close it gets to the expiration date.
- Rapid Changes
Typically, all option prices face a certain level of volatility and changes to the underlying price. However, in comparison to long-term options, weekly options tend to have a higher responsiveness to the changes in the price of the underlying asset. In other words, weekly options are more prone to volatility.
Advantages of Weekly Options Trading
There are plenty of advantages as to why weekly options can be beneficial and why it has caught the interest of many investors. Let us have a look at some of them.
Usually, weekly options tend to have a lower price compared to monthly options. They are also a lot less expensive in comparison with the shares of the stock and standard options. This is mainly because of the lesser time duration it stays valid for. Moreover, traders only have a few days to expect and watch the underlying stock to make a move as per prediction. Another reason for the lesser cost is the increased volatility of weekly options. This increased volatility can sometimes indicate a higher risk.
- Earn Profits and Cut Losses Faster
When it comes to weekly options trading, traders tend to capitalize on a lot of volatility that comes along with the shorter time frame. While the specifications of weekly options are similar to standard options, the short duration of weeklies is what makes this a delicate trade overall. As traders can quickly enter and exit positions, there is a higher chance to mitigate losses and compensate them with earned profits.
- Detailed Trades
Most of the news that comes out on channels and trading platforms are information that predicts the movement of the market in the immediate future. Due to the short duration of weekly options, the news available can be leveraged to make informed decisions and track these movements within the expiration date.
Disadvantages of Weekly Options Trading
While weekly options trading has a plethora of advantages, it also has a couple of drawbacks.
- Wide Spreads
While both the volume as well as the open interest are good for weekly options, it may not necessarily hold true for every strike that takes place in the weekly series. In some cases, strikes can have very wide spreads that may prove to be disadvantageous for short-term strategies.
- Lesser Time to Repair a Trade
As weekly options have a lesser span of time involved compared to a monthly option, there is lesser time available to repair a trade. In addition, rapid time decay also allows little room for error. In case the underlying asset has moved in an undesirable direction, adjusting the strikes may be challenging.
In a Nutshell
Weekly options can be beneficial for traders who would like to draw fifty-two returns per year instead of twelve. Moreover, due to the short duration of weekly options, informed decisions based on the news can be made. In addition, it is also cost-effective and provides several other advantages. Make sure that you plan your trading strategy well in advance to trade profitably.