A Change for Weeklys

Since the listing of weekly options on equities this blog has lamented the inefficiencies of the current system of trading weekly options.  We have argued that it made little to no sense to list an option that has 8 days of life to it, 2 of which are the weekend.  The set up has led to spreads that are too wide, in consistent option decay, and strange movements in weekly options.  Well all of that looks like it is about to change. Recently, the CBOE officially changed how it is going to list SPX Weekly options.

On May 31st, rather than list 1 set of weekly options on the Thursday before expiration, the CBOE will list 1 month of weekly expirations for trading.  Then following the expiration of the June 6 contact, the CBOE will add the July 13 contract.  You can read the full circular here.  This means that at any given time, there will be 4 weekly options trading, and that eventually, every weekly option will have had an approximate 30 day life span.  The 30 day life span should smooth out the decay so that the weeklys premium no longer moves with the hurky jerky action they currently have.  A smoother decay should make trading these options much more logical and relatable to the regular contract months.  It is also going to improve open interest in weekly contract months as there will now be essentially no difference between a weekly option and a serial option contract in the SPX.  The quarterlies will obviously still have some major volume differences.

This is great news for those that want to use the weekly options for their intended purposes.  It is also great news for those who want to constantly be short a near term option that has value to it. This is bad news for those that like to try and game decay in weekly options in the SPX.  While it currently is only in the SPX contract, if this is successful, expect this to move into every single contract out there that trades weeklys.

Mark Sebastian