Lessons from the Pros

Weak Weekly Options

On several occasions, I was asked to share my impression of the weekly options on some major indices, and in this article I shall first define them and then emphasize some of the pros and cons of trading them.

The weekly options were introduced by the CBOE (Chicago Board Options Exchange) at the end of 2005. The core difference between the weekly options and the regular options is the date of expiry. The regular options stop trading at the end of the third Friday of each month, and they expire on the following day Saturday. Unless there is a holiday on the third Friday, in which case they stop trading a day earlier.

However, the weeklies, as they are called, stop trading at the end of Friday of each week.

Usually, their label on an option chain has the name of current month and either Week A or Week One the same current month. For instance, the weeklies for the first week of December shall be listed either as Dec WeekA or simply as DEC1, depending on the different brokerages. The customary set up of the weeklies excludes the Week C, or the third week of the month, due to the fact that the Week C is by its default setting the third week of the month.

The weeklies emerge on the option chain on Friday mornings prior to the opening bell; thus at any given Friday there are two sets of weeklies listed. For example, at the end of the first week of December, there will be the weeklies for Dec WeekA listed with one day left to trade, normally posted as the number of days in parenthesis (1), as well as the weeklies for Dec WeekB with (7) seven calendar days left. There is a big difference between the number of trading days left, and the number of calendar days left. In our example, a trader could sell Dec WeekB (7) on the day they were listed and profit from the option’s premium time decay over the weekend while the markets are closed.

Moreover, the main reason why so many option traders have not encountered the weeklies is that they do not exist on most of the optionable products. In fact the weeklies are being traded only on several major indices. Specifically, the weeklies are listed on the SPX (Standard & Poors 500), OEX (S & P 100), and XEO (European version of S & P 100). A word of caution, the weeklies on the SPX do not stop trading on the Friday of each week but actually at the end of Thursday. However, their settlement price is based on the opening price of the SPX on Friday.

Lastly, an additional difference between the weeklies and the regular options lies in the liquidity. For example, when an option trader places an order to either purchase or sell a call or a put, there are six exchanges competing for the order. Namely, they are the AMEX (American Stock Exchange), NYSE (New York Stock Exchange), CBOE (Chicago Board Options Exchange), BOX (Boston Stock Exchange), ISE (International Securities Exchange), and PHLX (Philadelphia Stock Exchange). In the case of the weeklies, a buying or a selling order goes to a non-competitive environment of the Chicago Board Options Exchange because the weeklies were invented by them and trade on the CBOE exclusively.

Having defined the weeklies, we shall examine some of the more numerous cons of trading weeklies. Normally, the Open Interest and Volume for the individual strike prices on the weeklies is much lower than on the regular options. In the examples below, two weekly options chains were being compared on Thursday morning 11-13-08 prior to the opening bell. The blue lettering (OpInt) stands for Open Interest. In Figure 1, the XEO (European version of S & P 100) shows the highest open interest of 26 on 430 calls for November Week B.

Figure 1

Whereas, in Figure 2, the OEX (American version of S & P 100) has the highest liquidity of 666 on 420 calls, and 675 on 420 puts for the same week. Both products had closed at the same price 411.15 on Wednesday 11-12-08

Figure 2

In short, the lack of liquidity on the weeklies is a major obstacle.

The second disadvantage is due to the limited amount of strike prices that are posted for trading each week. On both the OEX and XEO there were only seven strike prices listed. On both of them the increments are priced in five points which makes it difficult to time a good entry for the spread trades. (On the SPX, the increments are ten points apart. Even those market makers that have worked on the CBOE floor and left it suggest avoiding trading the SPX altogether, weeklies or not.)

An additional nuisance is that the advanced option strategies such as Iron Condors are out of the question due to the limited number of strike prices posted.

Besides the limited amount of strike prices, the spread between the Bid and Ask is huge. Observe in Figure 2 that the calls for 420 are priced at 5.80 Bid and 6.90 Ask which is a dollar ten (1.10). In Figure 1, the spread is even greater for the same 420 call; 5.30 Bid and 7.00 Ask. Hence, the XEO is worse than the OEX.

By contrast, there are very few pros for trading the weeklies. One of them is the "juicy premium." Certainly, the CBOE had made them attractive in order to catch the attention of the traders to the weeklies. Yet, the fact that they had been around now for almost three years and did not gain popularity which is self-evident in the lack of liquidity as well as the lack of open interest, speaks the multitude about the trading weakness of the weeklies.

Thus in conclusion, the cons of trading the weeklies outweigh the pros. As a final point, I wish to state what I would like to see in the future and what would attract me to them: the greater liquidity (open interest and volume on individual strike prices), more strike prices listed, tighter spreads between the Bid and Ask as well as between the strike prices, and the end of CBOE monopoly of the weeklies.

- Josip Causic