Weekly Option Trading Changed for the Better Today

Option Pit Blog 11-15-12

If you ask anyone at any exchange, they will tell you one of the fastest growing parts of the option business (maybe the only growing part besides VIX) are option weeklies.  This was certainly true among the retail trading public.  If we look around at what the activity looked like in the weekly options, sans AAPL, the trading was overwhelmingly retail relative to a normal contract month.  Why?

The simple reason has to do with time decay.  We have all seen this time decay chart:


Every educator out there likes to point that the decay is fastest in the final 30 days, and speeds up even more in the final week.  When it comes to the weekly options though, the decay, up until today, was much less simple.  This is because most weekly options were listed on a Thursday and then expired the following Friday.  Thus, besides the extra short duration, the first 2 of the 4 days of the options life span were days when the exchanges were closed, 3 if we had a Friday or Monday off.

For those that understand how option time premium decay works into a weekend, this creates a major problem for traders, as much of the weekend is out by Friday mid-day.  From there, sometimes premium gets over or under sold, and the following week on Monday or Tuesday can be a mess as well. The decay flow, basically, was herkey-jerky throughout the week.

For those that are professional traders or active retail traders, the premium movements make for great trading.  For the big institutions, it makes trading in the weekly options a headache and not worth the time.  No more.  The Weekly options are now being listed in similar fashion to how the CME listed weekly options.  Weekly Options now expire every week, but they are listed a full 30 days to expiration or longer, up to 4 expirations away from their actual expiration date, just as SPX options did the same a few months ago.


Livevol (R) www.livevol.com

**Editors Note: for a list of the 10 products that hae these new Weekly’s expirations, scroll down to the Wednesday afternoon blog from Russell Rhoads titled “Expansion of Weekly Options Program”.

This is a huge win for institutional traders and hedgers. It should make the crazy herky-jerky decay go away. It also could have a profound effect on the ability of a hedge to pin point his or her risk. Along those lines, it could have a strong effect on the vol indexes as well, causing them to move less. The addition of weekly options is probably why GVZ took such a dive today. All in all, I think this is going to really help volume. A look at SPY above and we can see the volume these contracts already had in the 1st day of trading.