The Use And The Abuse Of The Weekly Options

[Kim]

Options trading is becoming more and more popular every year. The options become more liquid and more traders use them for hedging, speculation, income etc.

Weekly options, first introduced by CBOE in October 2005, are one-week options as opposed to traditional options that have a life of months or years before expiration. Not every stock or index has weekly options. For those that do, it basically means that every Friday is an expiration Friday. That opens tremendous new opportunities but also introduces new risks which can be much higher than "traditional" monthly options.

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[Kelly Park]

Good article, Kim. I have one suggestion, though. In your example, you used an AAPL option worth $10.1 and theta of -0.22. The "round" price of the option might lead to confusion about interpretation of theta as a dollar value or a percentage. With the call value right near $10, a beginer might be confused about whether to interpret theta as taking 22 cents away or 2.2%. (I know it is the same in this case, but with a different call price, it would be different.) If you used an option with a price of, let's say $8.40, then the theta of -0.22 would decrease the option value by 2.6% and the interpretation of theta would be clearer. (I'm not sure my comment is clear. I hope so.)

[Kim]

So how would you suggest to present it?

[Kelly Park]

I would just use a different option as an example, one with a price that isn't close to a round number like 10. Then there aren't two possible ways to get to the same answer. It is just easy to confuse math issues when discussing percentages, when one of the operands is 10. The article was good and made the points you intended. It is probably easier for me to see how a newbie would misunderstand something, since I am learning so much of this myself.

Edited July 31, 2012 by Kelly Park