The benefits of weekly options

Are you a short-term trader? If so, there's a different kind of options contract that may help you take advantage of market events more efficiently—options that expire weekly.

In contrast to traditional options that expire monthly, these types of options contracts—named "Weeklys" by the Chicago Board Options Exchange (CBOE)—may be particularly attractive for short-term traders looking to actively trade a particular position with the features provided by options.

The unique thing about weekly options

Weekly options are nearly identical to traditional options contracts in every way but one. Just like traditional options contracts, Weeklys grant the owner the right, but not the obligation, to buy or sell a security at a specified price before a certain date. The buyer of a Weekly call has the right to buy the underlying stock at a set price until the option contract expires. The buyer of a Weekly put has the right to sell the underlying stock at a set price until the date that the contract expires.

This date, known as the expiration date, is the lone differentiator between weekly options and traditional options, and is critical to understanding how weekly options work. As their name suggests, Weeklys expire every week, typically on Fridays at market close. Traditional options contracts typically expire on the third Friday of each month. On the other end of the spectrum, LEAPS can have expirations as far out as 3 years.

The benefits of Weeklys

To find weekly options at Fidelity, simply open an options chain and look for W that identifies weekly expirations.

There are several important implications of weekly options' shorter expiration date. Due to the relatively short time until expiration, Weeklys generally sell at a lower premium to otherwise equivalent options with longer expirations. The reason should be intuitive: Because there isn’t as much time value (i.e., the value attributed to the options associated with the time the option holder has left to exercise), buyers would not pay as much for the option because they would not have as much time for it to be in the money.

Contrast this pricing aspect of Weeklys with that of LEAPS, which usually sell at a higher price than traditional options because of the greater time value—allowing for a greater possibility the option could finish in the money.

Perhaps the most important aspect of weekly options is their potential to help traders employ short-term strategies—including targeting volatility associated with an earnings announcement, economic report, or other key event that might occur on a specified date in the short term. Instead of purchasing a regular options contract that might last several months, you can target a specific date and time period using weekly options.

A note of caution

The characteristics of weekly options can also present some unique risks, however.

For instance, assume you enter into a position using traditional options that does not go as you expect. If you have enough time until expiration, it may be possible to repair the position or "leg out" in order to hedge your risk exposure. Because of the short window associated with weekly options, it may not be possible to manage your risk effectively in this fashion. Also, you may want to practice-trade weekly options first to get a sense of how the implied volatility, Greeks, and other factors may differ from traditional options.

These risks are in addition to those inherent in all options. Before trading any type of options contract, you should fully understand how they work and what the risks are. If you do trade options, weekly options may help you find a better contract for your strategy.