The other day I tried to get my kids to watch some old TV shows I watched as a kid like “Leave It To Beaver” and “The Andy Griffith Show”. Shows were a lot different back then, but that’s a conversation for another time. My oldest son reluctantly sat with me for about 5 minutes then got up and said he could not watch anymore. He told me the black and white picture made him nauseous. I told him it was probably due to content more than color. He was likely going through “detox” from the stuff he watches in his TV shows. I made him watch the rest of the show. With a bucket next to him.
Lately there has been much attention on the weeklies. Clients and students have been asking me about them and the relatively new wave of information that is out there on this topic. It almost seems the idea and strategies of trading weekly options are brand spanking new and we better understand them in order to play. Well one thing is true – we would be well served to understand the characteristics of trading options with one week until expiration – something we’ve been talking about for years. That’s been an issue ever since options have been around, since once a month we have to deal with something called expiration week. And while “weeklies” are relatively new, the characteristics of trading them are the same as ever.
Trading the week of expiration is generally a higher risk – higher reward proposition. From a short option prospective, the higher reward is typically a higher theta. As we know, time decay really kicks in expiration week for options near the at the money strike. The risk side of the equation for the options seller is the negative gamma. It too gets higher as we approach expiration week. And as many of us have seen, a larger negative gamma can potentially turn our position from a winner to a loser quite quickly.
And let’s be clear – there are no special strategies for weeklies. The same strategies are used for weeklies as options with more time to expiration. The characteristics and profiles will be different just as they are different between options with 1 month and 3 months until expiration. There is no free lunch in trading. Weeklies to LEAPs all are priced according to perceived risk and expectation by the market. It is up to the trader to evaluate, execute and manage.