Weekly Options Expand to Stocks

Trading equity options on a monthly basis is a thing of the past, now that the CBOE has introduced weekly options to a small group of securities. As of July 5, 2010, weekly options were expanded from indexes to stocks and ETFs, including Apple, Google, Ford, and the Direxionshares Financials 3X (see link).

These new products, which launched at the start of earnings seasons (most likely intentional), enables traders with shorter time horizons to speculate on large movements in securities while paying a discount on time value. Long straddles may finally become a mathematically profitable trade, since the discount on time value creates a smaller break-even range. It will also allow options writers to become more active and take on less time risk, and possibly earn more income through calendar spreads and other strategies.

Every Thursday, the weekly options are introduced and expire the Friday in the following week, providing six days of existence, and two days for roll outs if required.

The weekly options have been very popular. In only three weeks of inception, volume on the weekly options are above 50 per cent volume of the regular monthly contract with the same strike. In many instances, they are trading with more volume and have more open interest as well.

So what are some ways to make money? Here are two real-life examples using today's closing prices for a company with and without earnings.

Amazon [AMZN:NDQ] with earnings July 22 closed at 117.43 on July 21:

Expiration	Option type	Strike	Premium (bid x ask)
July 23	Call	120.00	2.68 x 2.75
August 21	Call	120.00	4.90 x 5.00
July 23	Put	115.00	2.63 x 2.75
August 21	Put	115.00	4.95 x 5.05

Apple [AAPL:NDQ] with no earnings closed at 254.24 on July 21:

Expiration	Option type	Strike	Premium (bid x ask)
July 23	Call	260.00	1.03 x 1.05
August 21	Call	260.00	7.30 x 7.50
July 23	Put	250.00	1.26 x 1.33
August 21	Put	250.00	7.65 x 7.80

In the tables above, we see that Amazon weeklies, which releases earnings tomorrow, carry a premium more than half the monthlies. Although they are high, the premiums are significantly reduced. The break-even for a long straddle is now 114.50 and lower or 125.50 and higher, an immediate move of about 6.8 per cent, instead of 8.6 per cent.

And the Apple options, which no longer carry a premium for an earnings move, still carry $1 in value. Why does this matter? Many new option writers do not understand that writing options are profitable 95 per cent of the time. As a result, they are hesitant on writing the monthly options for fear the security will make a large move. Most traders will sacrifice significant time value and write them in the final week, exposing themselves to less risk, a forgiving characteristic. Now, providing weekly options allows these traders to make money every week.

Calendar spreads can also become very profitable. Spreads are a good way to replace longing stocks, especially expensive ones like Google, Apple, and Amazon (which also pay no dividend). Go long a LEAP and write calls at that strike or above.

I did a calendar spread for Apple prior to earnings on the 260 calls and made money on the August call going up in value and on the July calls losing a chunk of premiums after earnings. If it had gone above 260.00, I would have simply rolled out the July 23's to the July 30's and capture an additional week of time value.