What is the weekly option, and how does it work nowadays?

As someone interested in trading, have you thought about what weekly options are? How crucial are those options for subsequent success on the market, how do they work, and how to recognize them?

First, the stock market offers many investment options, attracting global amateur and retail investors. Notably, options trading has emerged as a favored derivative among them. If you are familiar with the concept of traditional options, then you will understand that weekly options are the same as those, with one difference. 

But how do these options work? What is an option contract or an option position? How to become an option buyer? Let’s get all the crucial information!

What is weekly option – definition and explanation

Weekly options are brief-duration contracts with the same product details as the standard agreements for that item.

Something else is crucial to remember for those wondering “what is weekly option”: Weekly options act almost identical to monthly options. Starting from 2022, investors can have 52 yearly expirations instead of the traditional 12 on the third Friday. 

Launched several weeks before they expire

These are launched several weeks before they expire. So, they do expire every Friday. Weekly options can be bought like traditional options, giving the owner the right, not the obligation, to trade a security at a set price by a given date.

So, these options are introduced on Thursdays. These options last for eight days, concluding the subsequent Friday. Their rising popularity in buying and selling enables traders to leverage timely news effectively.

Extremely popular in trading

They’ve gained immense popularity in trading, enabling traders to leverage timely updates.

Numerous weekly options exist on leading indices and ETFs. 

How do these weekly options work?

The Chicago Board Options Exchange (CBOE), enabled these options for the first time in 1973, where traders make quick bets due to rapidly accelerating time decay. This setting includes naked puts, calls, and noticeable bid-ask spreads.

1977, the put option was launched, becoming a favored tool for short-term bets. Its trading volume surged over the years. In 2005, thirty-two years after introducing the call option, the CBOE initiated a trial for weekly options, introducing more opportunities for pinning action.

Key Takeaways

In the stock market, strategies effective with longer-dated options can also suit weekly. Options traders can leverage the quick price movement and pronounced time decay in a weekly option’s final days.

Instead of earning option premiums 12 times with monthlies, you can do it 52 times weekly. Whether using naked puts, covered calls, or other trading strategies, they align well with weekly. But the bottom line: their shorter span makes them more likely to expire worthless.

Engaging in long option positions? Grasping market prices is key. To delve into our editorial perspective on these strategies, explore further.

What are the best examples of weekly options?

Various indexes that offer weekly options, both in terms of calls and puts, include:

• Cboe Global Markets, Inc. (CBOE)
• S&P 500 Index (SPX)

In addition to all that, these popular exchange-traded funds (ETFs) provide weekly options, allowing traders to leverage money OTM (Out of The Money):

• SPDR Gold Trust ETF (GLD)
• iShares MSCI Emerging Markets Index ETF (EEM)
• iShares Russell 2000 Index Fund (IWM)
• Invesco QQQ (Q)
• SPDR S&P 500 ETF (SPY)
• Financial Select Sector SPDR ETF (XLF)

To delve deeper into the dynamics of these options and our approach to covering them, please learn about our editorial perspective.

Are weekly options superior to monthly ones?

The premiums are generally reduced due to the shorter expiration period of weekly options compared to extended monthly contracts. This aspect has notably driven their popularity among traders inclined to purchase options and those engaging in expiration-day trades.

What are the pros and cons of weekly options?

What many traders and investors in the market are interested in before investing in these options are their pros and cons.

Advantages of weekly options:

• Weeklys enable short-term bets on events like sudden interest rate changes or specific news.
• If you predict a stock like XYZ will vary due to an upcoming report, using weekly means less premium at risk compared to monthlies. This could save costs or offer better returns based on stock actions.
• Weeklys generally have narrower bid-ask spreads than monthlies, and the noted pinning action in monthlies is less evident.

Disadvantages of weekly options:

• Due to their brief span and fast decay, adjustments to unfavourable weekly trades are challenging.
• Not all strikes in the weekly series offer stable interest, affecting the viability of using them as a futures contract. This can lead to wider spreads, making them less ideal for short-term approaches.

Weekly Options Summary

Weekly options are short-term contracts covering equities, ETFs, or indices.

Key Points:

• Unit of Trade: Equity/ETF options cover 100 shares; index options are $100 times the index.
• Premiums: Valued at $100/point.
• Strike Price: Aligns closely with standard listings.
• Exercise & Settlement: Equity or ETF options settle in two days; index options cash settle the next day.
• Expiration: As specified in the contract.
• Position Limits: Range from 25,000 to over 250,000 contracts.
• Trading Hours: Usually 9:30 a.m. to 4:00 p.m. ET.

Bottom Line – What is a weekly option

Weekly options are a unique kind of options contract with a shorter expiration window than traditional options. While they can fit certain strategies better due to their duration, they come with challenges. 

Their limited timeframe might restrict effective risk management, especially if a trade pans out differently than anticipated. Furthermore, factors like implied volatility and the Greeks can behave differently in weekly options than traditional ones. 

As with all options, understanding their mechanics and inherent risks is crucial before trading. If you’re considering options trading, practising with weekly options might offer insights into finding the right contract for your strategy.

FAQ: Understanding Weekly Options

What are weekly options?

 They are short-term contracts with 52 yearly expirations, expiring every Friday.

How do weekly options differ from monthly options?

Weekly options last eight days and expire every Friday, whereas monthlies expire 12 times a year.

Why were weekly options introduced?

Introduced by CBOE in 1973 for quick bets due to rapidly accelerating time decay.

What are some examples of assets with weekly options?

Indices like CBOE and S&P 500, and ETFs like SPDR Gold Trust ETF (GLD) and Invesco QQQ (Q).

What are the pros and cons of trading weekly options?

 Pros: Short-term bets, narrower bid-ask spreads, less premium risk. Cons: Brief lifespan, challenging adjustments, potential for wider spreads.