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  1. They get a bad name because of their short-term nature, but at their core, they're just options with a shorter lifespan. All of the same principles of options apply to them, so if you can get past the stigma associated with them, there are plenty of trading opportunities present. As Euan Sinclair once said about this subject, “the house cat and tiger have more similarities than differences.” And by the way, for those associating weekly options with gambling, you should know that most major financial institutions nowadays are significant players in weeklies. Just ask Roni Israelov, the former manager of options strategies at AQR, who told the FT, "If I have monthly options, I get 12 independent bets per year. If I have weekly, I get 52 bets per year. Daily gives me 252. If you're generating trading strategies, the ability to have more 'at bats' and more diversification by taking more independent trades can be useful." Increased Capital Turnover Suppose you're a mechanical options trader who routinely sells options in 45-60 DTE expirations with high implied volatilities. Take your profits at 50% of max profit. And you could hold your average trade for a few weeks before reaching your desired profit level. If we take the same assumptions but with shorter, 10-15 day expirations, you'll be holding your average trade for just a few days. You're turning over your capital several times quicker, and assuming you can select trades with a similar expected value, you're able to generate higher returns, increasing your sample size and, in theory, decreasing the variance of your portfolio. I'm simplifying in a big way. Short-dated options have different properties in the form of market dynamics and Greeks that'll affect this equation considerably. However, the concept is that getting more "at-bats," to use Israelov's word from the intro of this piece, is typically better, assuming you can keep the rest of the variables relatively constant. Volatility is More… Volatile in Weekly Options (“Vol-of-Vol”) As a principle, shorter-dated (i.e., weekly options) have less vega than longer-dated options. To note, vega is an option's sensitivity to changes in implied volatility. Just like delta, theta, and gamma, the consequences of an option's vega are straightforward to calculate. For each one-point increase in implied volatility, the option price should change by its vega. For instance, let's take an SPX call option worth $10.00 with an implied volatility of 18 and a vega of .20. Should the implied volatility of the chances increase to 19, the option's price would increase to $10.20. This works in both directions. Because short-dated options typically have low vega, many traders mistakenly assume that weekly options are relatively unaffected by vega, i.e., the risk of implied volatility increasing or decreasing. But that would be incorrect. While short-dated options have low vega on the face, the implied volatility on short-dated possibilities is much more volatile. In other words, volatility is more… volatile. The effects of short-term volatility dampen with time. Without referencing actual numbers, think about the difference in how the value of a 1-year LEAP and a 1-day weekly option would respond to a 10% change in the underlying price. Sure, both values are affected, but with a whole year until expiration, that 10% one-day change is almost a blip on the radar as far as where the underlying will be a year out. So short-term implied volatility needs to account not only for these "black swan" type risks but also for business-as-usual, which is realized volatility being below implied. The sellers of these options aren’t naive and need to be compensated for taking on this wide range of risks, so they demand a higher variance premium. So this property of short-dated options can both help and harm you, depending on which side of the trade you’re on and what type of risks you prefer to take. Volatility is Sometimes Too High (Or Low) In the previous section, we discussed how the implied volatility on short-dated options is more volatile than the IVs on longer-dated options. This is because, with so little time to expiration, a slight short-term aberration like order flow or a piece of news can dramatically affect where the underlying trades are at expiration. With more time to expiration, these factors sort themselves and volatility tends to remain closer to a longer-term average With volatility being more volatile in these options, you can sometimes identify periods in which the market overreacts and you deem volatility too high or low, allowing you to swoop in and make a good trade quickly. Theta Decay is Different in Weekly Options Longer-dated options benefit from significantly positive theta, giving a trader who sells longer-dated options a positive carry from theta decay. Throughout the life of the option, theta decay occurs at a non-linear rate. Here's a chart for an intuitive sense: One of the most common arguments in favor of longer-dated options, specifically in the range of 30-45 days to expiration, is that these options not only have much theta, but they're right at the sweet spot where the rate of theta decay begins to accelerate. Indeed a strong argument. And proponents of this philosophy are right. The absolute level of theta for longer-dated options is indeed higher. The theta decay per day as a percentage of the option price is much higher in shorter-dated options. Let’s compare the same strike in two different expirations. A $SPY .30 delta call expiring in five days is trading for $1.21 with a theta of -0.21, representing a -17% rate of decay daily, while a .32 delta call expiring in 37 days is trading for $4.10 with a theta of -0.11, which is a -2.61% rate of daily decay. Of course, the rate of theta decay will accelerate in the longer-dated option as expiration nears. So you have two options, both of which are inherently correct. You can go with the longer-dated option at the "sweet spot" of the theta decay curve and ride it for a few weeks, or you can churn and burn weekly options, turning your capital over and moving on from trades very quickly. Weekly Options Have Very High Gamma If you recall, gamma is the rate of change of delta. The higher the gamma, the more dramatically a tick in the underlying will affect the delta. As a rule, the closer options get to expiration, the higher their gamma is, especially for near-the-money options. But why is this? As expiration nears, options that aren't in the money expire worthless. This makes the value of near-the-money options highly suspect and subject to massive price swings, which is the intuitive definition of gamma. There's an increased uncertainty as to which options will expire worthless, so each tick in the underlying creates more significant swings in the delta as you get closer to expiration. This is a gift and a curse. If you're on the right side of the market, you see significant gains quickly, but getting caught on the other side means your fortune quickly wanes. Bottom Line Weekly options to monthly options as day trading are swing trading. Fortunes are won and lost more rapidly in weekly options, and they favor the bolder, faster-acting trader over the analytical "dot the i's and cross the t's" type of trader. Plenty of successful traders trade weekly options, those that trade longer-dated options, and many that trade both. Options trading is very much about trade-offs, and said trade-offs often come down to temperament or personal preference. One sure thing is that if you trade weekly options, you have to become much more active as a trader, which is a cost in itself. Related articles: The Use And The Abuse Of The Weekly Options The Risks Of Weekly Credit Spreads Should You Trade Weekly Options? Make 10% Per Week With Weeklys? Are Weekly Options A Form Of Gambling?
  2. Hi, I'm wondering if anyone can help with some bloomberg code issue I have. I'm looking at the EuroUSD fx weekly options (6E / EC), and trying to work out what the code for the next week will be, if I use the example: "UEAWV1P5 1.145 Curncy" "EUAW" = the Friday Option expiry for 6E "V1" = October (V) 2021 (1) "P" = put "5" = week 5 the following week should be week 1 of November (X) , but bloomberg say it doesn't exist. i.e I would have thought it should be: UEAWX1P1 1.145 Curncy any thoughts would be appreciated.
  3. I appreciate the email. Those are very wise words. Too bad this email came after three devastating losses the newsletter experienced in 2016 (150%, 78% and 69% losses before commissions). Unfortunately, it looks like they didn't really learn any lessons from those losses. The newsletter members already booked two more devastating losses of 96% and 89% in the first five months of 2017. Definition of insanity is "doing the same thing over and over again and expecting different results". From the FAQs of this newsletter: As we mentioned here: Oftentimes you'll find this in a credit spread newsletter where the big loss just hasn't happened yet (it will). Here is the problem with weekly credit spreads: most of the time, they will do fine, but if the market really does go south the position will be in trouble well before the short options go in-the-money. If the market drop is fast and severe (e.g., flash crash) there will be nothing you can do - the trades will be blown out with no way to recover, your entire investment will be gone. We warned about those "easy gains" several times. This is what we wrote in Can You Really Make 10% Per Month With Iron Condors? article: Here are some mistakes that people do when trading Iron Condors and/or credit spreads: Opening the trade too close to expiration. There is nothing wrong with trading weekly Iron Condors - as long as you understand the risks and handle those trades as semi-speculative trades with very small allocation. Holding the trade till expiration. The gamma risk is just too high. Allocating too much capital to Iron Condors. Trying to leg in to the trade by timing the market. It might work for some time, but if the market goes against you, the loss can be brutal and there is no another side of the condor to offset the loss. Unfortunately, many options gurus present those strategies as safe and conservative. Nothing can be further from the truth. As mentioned (correctly) in the above email, weekly credit spreads are very volatile and aggressive. You should allocate only small portion of your options account to those trades. Related articles: Can You Really Make 10% Per Month With Iron Condors? Why Iron Condors Are NOT An ATM Machine Why You Should Not Ignore Negative Gamma Get Real Trade Iron Condors Like Never Before Want to learn how we reduce our risk? Start Your Free Trial
  4. Good question. When I trade Weeklys, I do start the trade on Monday and typically exit Wed or Thurs. I look to earn 30 to 40 cents on a 5-point index iron condor. The initial premium tends to be in the vicinity of 80 cents. These options are reasonably far OTM. However, the sales are not naked short like yours. The fact that you prefer to sell naked options changes the risk profile: You do not buy protection, so your short option is much farther OTM than the one I sell. That increases the chances you will have a profitable trade. Your potential loss is gargantuan. I agree that it will not happen often, but in my opinion, it happens often enough to make the sale of naked options too dangerous. If you do not get overconfident and trade this strategy in small position size, then it can be viable for the account of an experienced trader. Why experienced? Because risk management is the key to the trader’s success. The trade If we sell a low-delta, far OTM option, collecting 10% of the margin requirement; or, if we sell a 5-point iron condor for $0.50 – then we have an opportunity to earn that 10%. To earn 10%, we must allow the options to expire worthless. That involves extra risk because each day comes with the tiny possibility of market-moving news. I know that works for many traders, but I never do that. I prefer to eliminate all risk one or two days early and avoid overnight risk for that extra day. So I would be happy to pay 20 cents in the above scenario, reducing profits to a still very acceptable 6% before commissions. Risk We can look at risk as the probability of losing money and I agree that the probability is well on our side. We can also consider risk to be the money at risk, or the sum that could be lost. That is how I prefer to think about risk. From your perspective, risk is low. From mine, it is very high. So is this high risk or not? The answer must be an opinion based on fact, but remains an opinion. That means intelligent people can disagree. For me, short-term options come with far too much negative gamma. Translating that to English for the newer option traders: When we sold an option or spread that looks and feels ‘safe’ because it is somewhat far OTM, when time is short, it does not take much of a move in the underlying asset to push that short option ITM. And that is the high risk of which I speak. When we collect a small cash credit, the potential loss is high. The problem is that too many rookies traders do not know how to react. Some exit far too early in a panic. Others sit frozen with inaction and wind up taking the maximum possible loss. Earnings Potential If you can earn 10% per week and compound those earnings, after one year, $1,000 would become $142,000. I’m sure do not expect to win every week, but I hope that you recognize that it is impossible to earn such reruns with low risk. My conclusion is that your plan is fine for the experienced, disciplined trader who is skilled at managing risk. However, it is far too dangerous for the inexperienced trader. Related articles: Should You Trade Weekly Options? The Options Greeks: Is It Greek To You? The Risks Of Weekly Credit Spreads Options Trading Greeks: Gamma For Speed Options Trading Greeks: Theta For Time Decay Why You Should Not Ignore Negative Gamma Want to learn how to reduce risk and put probabilities in your favor? Start Your Free Trial
  5. Options, used wisely, can and do hedge market risks. Many strategies, from the basic covered call to uncovered puts, covered strangles, collars and even butterflies or condors, all can be used as risk-neutral hedging strategies. The percentages go way up in your favor when you combine conservative strategies with short-term expiration (for short positions), proximity (or underlying price to strike and of underlying price to resistance or support) and identification of reversal signals with confirmation. That’s basically the way that options can be used to move the probabilities in your favor. Are there differences between probabilities and odds? It’s the same thing, but gamblers like to think of winning and losing as playing the odds, and they invariably believe they can overcome the averages. Even a roulette bet on black or red, often thought of as a 50/50 bet, is not quite that favorable. With the zero and double-zero in mind, the odds of winning on a black or red bet are 47.4%, not 50%. There are 18 black, 18 red and 2 green outcomes, so black or red is an 18 out of 38 probability (18 ÷ 38 = 47.4%). This means that if you bet on either red or black consistently, you will eventually lose. The odds are slightly better with weekly options, but it’s only a 50-50, or an even bet. First introduced in 2005, weekly options exist for a short term only, just 8 days. They are set up every Thursday and expire the following Friday. At first glance, weekly options are very cheap. But it could also be a sucker bet, just like the seemingly favorable rules on many casino games. For example, you can buy a weekly call option and accept the odds of the underlying price moving high enough by next Friday to make it profitable (meaning intrinsic value outpaces time decay). The same observation works for weekly puts, but in the opposite direction. You are giving up the advantage of a longer term in exchange for a cheaper premium. But for a long position, this seems like a long shot, to use the terminology of gambling. For short options, the odds move very nicely in favor of the trader. Because time decay will be rapid, opening a short weekly option can be very profitable. The dollar amounts are not huge, but the annualized return can take you to double digits. In fact, on average, options lose one-third of remaining time value between the Friday before expiration and Monday. This is because three calendar days pass but only one trading day. This is a fact often overlooked by traders: Time decay takes place every day, whether the market is open or not. This represents a great value. Going short, either with calls or puts, is a great advantage using weekly options. A few suggestions for increasing the odds (probability) in your favor: Build in a buffer when possible. This is a distance between the option’s strike and current price of the underlying. By keeping the position out of the money, you receive less for the position, but you also reduce exposure to exercise. As the underlying moves toward the money, the OTM call or put can be closed or rolled to avoid exercise. But there is a good chance that time decay will outpace intrinsic value. Pay attention to resistance and support. The most advantageous timing to open a short option is when the underlying price moves above resistance (timing to open a short call) or below support (open a short put). Assuming the price does what it usually does – retrace back into range – this timing maximizes your probability. This is especially true if the move outside of the trading range occurs with a price gap. Look for reversal signals and confirmation. Pay attention to traditional Western signals like double tops or bottoms or island clusters; candlesticks; volume spikes; moving average convergence; and momentum oscillators. Only act when you find the signal and confirmation; this increases your chances for success. Pay attention to strength or weakness in the trend. The best reversals happen when a previously strong trend reaches a plateau, slows down, and then turns in the opposite direction. Weekly options can be summarized with the long and short attributes in mind. Long traders must fight against time decay and time. Short traders benefit from time decay and time. With the four guidelines in mind, what otherwise could be 50-50 odds are moved nicely in your favor. Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his website at Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.
  6. Introduction In November of 2012, CBOE and C2 issued Information Circulars IC12-093 and IC12-015 announcing the expansion of the number of Weeklys that can be listed for certain securities. CBOE and C2 may now list up to five consecutive Weeklys in a class provided that an expiration does not coincide with one that already exists. According to CBOE, "Weeklys were established to provide expiration opportunities every week, affording investors the ability to implement more targeted buying, selling and spreading strategies. Specifically, Weeklys may help investors to more efficiently take advantage of major market events, such as earnings, government reports and Fed announcements." 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. Basically, just about any strategy you do with the longer dated options, you can do with weekly options, except now you can do it four times each month. Let's see for example how you could trade SPY using weekly or monthly options. Are they cheap? Lets buy them SPY is traded around $218 last Friday Aug. 19, 2016. Looking at ATM (At The Money) options, we can see that Sep. 16 (monthly) calls can be purchased at $2.20. That would require the stock to close above $220.20 by Sep. 16 just to break even. However, the weekly options (expiring on August 26, 2016) can be purchased at $1.08. This is 50% cheaper and requires much smaller move. However, there is a catch. First, you give yourself much less time for your thesis to work out. Second and more importantly, the weekly options are much more exposed to the time decay (the negative theta). The theta is a measurement of the option's time decay. The theta measures the rate at which options lose their value, specifically the time value, as the expiration draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option's value will decrease every day. When you buy options, the theta is your enemy. When you sell them, the theta is your friend. For the monthly 218 calls, the negative theta is -$4.00. That means that the calls will lose ~1.8% of their value every day all other factors equal. For the weekly calls, the negative theta is a whopping -$7.70 or 7.1% per day. And that number will accelerate as we get closer to the expiration day. You better be right, and you better be right quickly. Buying is too risky? Maybe selling is better? If this is the case you might say - why not to take the other side of the trade? Why not to use the accelerating theta and sell those options? Or maybe be less risky and sell a credit spread? A credit spread is when you sell an option and buy another option which is further from the underlying price to hedge the risk. Many options "gurus" ride the wave of the weekly options trading and describe selling of weekly options as a cash machine. They say that "It brings money into my clients account weekly. Every Sunday my clients access their accounts and see + + +.” They advise selling weekly credit spreads and present it as a "a safe option strategy because we’re combining an option purchase with an option sale resulting with a credit into your account". This short term option trading strategy can work very well... until it doesn't. Imagine for example someone selling a 206/205 put credit spread on Thursday June 23, 2016 with SPY around $210.80. That seems like a pretty safe trade, isn't it? After all, we have just one day, what could possibly go wrong? The options will probably expire worthless and the clients will see more cash in their account by Sunday. Well, after the market close, news about Brexit took traders by surprise. The next day SPY opened below $204 and the credit spread has lost almost 100%. So much for the "safe strategy". Of course this example of weekly options trading risks is a bit extreme, but you get the idea. Those are very aggressive trades that can go against you very quickly. Be Aware of the Negative Gamma So what is the biggest problem with selling the weekly options? The answer is the negative gamma. Condor Evolution. Source: The gamma is a measure of the rate of change of its delta. The gamma of an option is expressed as a percentage and reflects the change in the delta in response to a one point movement of the underlying stock price. When you buy options, the gamma is your friend. When you sell them, the gamma is your enemy. When you are short weekly options (or any options which expire in a short period of time), you have a large negative gamma. Any sharp move in the underlying will cause significant losses, and there is nothing you can do about it. Here are some mistakes that people make when trading Iron Condors and/or credit spreads: Opening the trade too close to expiration. There is nothing wrong with trading weekly Iron Condors - as long as you understand the risks and handle those trades as semi-speculative trades with very small allocation. Holding the trade till expiration. The gamma risk is just too high. Allocating too much capital to Iron Condors. Trying to leg in to the trade by timing the market. It might work for some time, but if the market goes against you, the loss can be brutal and there is no another side of the condor to offset the loss. The Bottom Line So is the conclusion that you should not trade the weekly options? Not necessarily. Short term option trading can be a good addition to a diversified options portfolio - as long as you are aware of the risks and allocate only small portion of the account to those trades. Just remember that those options are aggressive enough to create quick profits or quick losses, depending on how you use them. Related articles: The Options Greeks: Is It Greek To You? The Risks Of Weekly Credit Spreads Options Trading Greeks: Gamma For Speed Options Trading Greeks: Theta For Time Decay Why You Should Not Ignore Negative Gamma Make 10% Per Week With Weeklys? Want to learn how to reduce risk and put probabilities in your favor? Start Your Free Trial