It’s a trader’s top conundrum. A stock’s next near-term move is crystal clear, but there’s not enough potential net-movement to really matter. Since trading is all about managing risks and rewards, a lack of reward dictates you skip taking your shot.
There’s a simple solution most folks don’t know about, or are at least too unfamiliar with to try. That’s weekly options.
Veteran traders likely know that most equity (and index, and exchange-traded fund) options expire on the third Friday of every month, although they can be issued months and even years before their expiration dates. Options are attractive trading instruments, of course, because they can magnify the price changes of a stock or index. Depending on traders’ risk tolerances, sometimes these trades can achieve tenfold leverage, if not more. And for a long, long time, there were enough option choices to meet every conceivable need.
As the market’s matured and become more volatile though, traders’ needs have grown. Like their monthly and quarterly counterparts, weekly options were launched in 2005 to offer traders a way of leveraging even the smallest and shortest-term moves. Notably, weekly options provide even more trading leverage than their more conventional monthly and quarterly counterparts.
The big difference between weeklies and the others? Most weekly options are typically issued and begin trading on Thursday and expire the following Friday (although a handful of the market’s most-traded stocks continually support weekly options expiring one, two, three, and even four weeks out).
Same-week versus next-week
There are only two (related) key terms you really need to understand with weekly options, although neither is official. Those terms are same-week and next-week. A typical weekly option is a next-week option during the week of the Thursday it’s issued, and a weekly option becomes a same-week weekly option in the week following its usual Thursday issue.
And yes, there’s an important distinction between same-week and next-week options. The options closer to expiration than their comparable counterparts are less responsive to movement in the underlying stock, and yet they also suffer greater daily loss of value due to their shortening useful life. The thing is, they may still be worth trading despite their disadvantage.
The table below puts this tradeoff in perspective, comparing weekly Amazon (AMZN) same-week options set to expire just four days from now – issued a week ago – versus the identical next-week weekly options issued today that will expire eleven days from today. With Amazon shares priced at $2426.40, the calls with a strike price of $2410 expiring at the end of this week are valued at $57 apiece ($5700 per contract), while the $2410 calls expiring at the end of next week cost $95, or $9500 per contract.
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You’re seeing that correctly. Traders are paying an extra $3800 per call to have an extra week to cash in on whatever move is brewing for Amazon shares. That’s a lot of added cost, although the additional cost may be a fully justified. See, pricing isn’t the only key difference between these two weekly options. Also note the sizeable difference between the so-called “greeks” theta and delta.
Not all the same… at all
In simplest terms, delta is how much the value of the option in question changes for every dollar the price of Amazon stock itself changes. If Amazon’s value rises from $2426.40 to $2427.40, the call option expiring in four days only sees price growth of $0.52, or $52 for a per contract. The $2410 call contract expiring in eleven days, however, will improve by $56 per contract with just a $1 increase in the price of Amazon shares. Better still, the more Amazon’s price rises and the deeper these calls move into the money, the bigger their respective deltas become. Such a move will help both options, to be clear, but it will help the latter one by more… in addition to giving you an extra week’s worth of time to capitalize on any brewing move from Amazon shares.
The longer-term option has another advantage over the calls expiring just four days from now. That’s a lower theta, or less time decay. With a theta of $6.19, the option with a nearer-term expiration is losing $6.19 per day solely due to the passage of time. The $2410 calls set to expire eleven days from now, however, are only losing less than $4.00 per day — $400 per contract — just due to time.
Don’t get too excited about the longer-term option among these two choices though. Again, the more responsive, lower-theta weekly option costs 66% more than the nearer-term call expiring at the end of this week does. Look at it in risk-versus reward terms: The cheaper, same-week options actually offer a great deal more leverage due to their lower cost. You’re just paying more for more time to make money on this particular trade.
And yes, the pricing, time decay, and delta figures factor the exact same way with weekly put options.
The secret to success
The usual trading tradeoff still applies here. In this case, if you’re buying same-week options you need quick moves now, but the rewards can be tremendous. With next-week options, you’re not getting as much leverage now, but you are gaining price stability, and time. Both choices can pay off nicely depending on how matters take shape once you’re in a position.
The trick? Selecting the best weekly option for a particular trading scenario.
This is easier said than done, of course. Given that proper trade selection is typically the difference between winning and not winning the weekly options game though, this is how smart traders should be spending a great deal more of their analytical time than most of them are.
If you’d like help in mastering the most critical step in selecting trades on these highly leveraged instruments, click here to see how Big Daddy chooses between same-week and next-week options.
*In the week of the third Friday of the month when regular monthly or quarterly options are scheduled to expire or the market is closed, weekly options typically expire on Thursday of the week following their issue.
