What Is Weekly Options?
Weekly options are a type of options contract that have a significantly shorter expiration date compared to standard monthly options. As the name suggests, weekly options typically expire on a weekly basis, usually at the close of trading on Friday, though some may expire mid-week. These financial instruments fall under the broader category of derivatives, as their value is derived from an underlying asset like a stock, index, or exchange-traded fund. Weekly options provide traders and investors with the flexibility to fine-tune their strategies around specific short-term market events, such as earnings announcements, economic data releases, or corporate actions. The rapid approach to expiration means that the dynamics of weekly options, particularly regarding time decay and volatility, differ significantly from longer-dated options.
History and Origin
The concept of standardized options trading gained widespread adoption with the opening of the Chicago Board Options Exchange (CBOE) in 1973. Initially, options contracts were limited to quarterly expirations, followed by the introduction of monthly expirations. The innovation of weekly options emerged later, driven by market demand for more granular control over investment strategies and the ability to capitalize on short-term market movements. The CBOE played a pivotal role in this evolution, announcing the launch of "Weeklys" in September 2005, with the first contracts becoming available on October 28, 200512. These initial weekly options were based on major market indexes, offering a new tool for trading around specific news or events10, 11. Over time, the program expanded to include weekly options on exchange-traded funds (ETFs) and single stocks, providing a wider range of opportunities for market participants9. The introduction of weekly expirations marked a significant step in the ongoing evolution of the options market, leading to increased trading opportunities and more precise risk management strategies.
Key Takeaways
- Weekly options are short-term options contracts that typically expire every week, offering quick trading cycles.
- They are highly sensitive to time decay and rapid changes in volatility due to their brief lifespan.
- Weekly options are often used for strategies targeting specific short-term events, such as earnings reports or economic announcements.
- Their short duration can lead to magnified gains or losses compared to longer-dated options, appealing to those seeking high leverage.
- High liquidity in actively traded weekly options series is crucial for efficient entry and exit.
Interpreting the Weekly Options
Interpreting weekly options requires a keen understanding of how their short lifespan impacts their pricing and risk profile. Due to the accelerated time decay inherent in weekly options, their extrinsic value erodes much faster than that of longer-dated options. This means that a weekly option's price is highly sensitive to the passage of each trading day, making precise timing and accurate directional forecasts critical.
Furthermore, weekly options are highly susceptible to changes in implied volatility. Because there is less time for an underlying asset to make a significant move, even small shifts in expected future price fluctuations can have a substantial impact on the option's premium. Traders often use weekly options to express short-term views on an asset's price in anticipation of a specific event. Their compressed timeline means that successful interpretation often hinges on identifying catalysts that can drive sharp, immediate price movements in the underlying asset before the expiration date.
Hypothetical Example
Consider an investor, Alice, who believes that Company XYZ, currently trading at $100 per share, will announce positive earnings in three days, causing its stock price to surge. Instead of buying shares outright, Alice decides to use weekly options to potentially magnify her gains.
On Monday, Alice purchases a weekly call option on Company XYZ with a strike price of $101, expiring that Friday. Each option contract represents 100 shares. She pays an option premium of $1.00 per share, totaling $100 for one contract ($1.00 x 100 shares).
On Thursday, after the earnings announcement, Company XYZ's stock indeed jumps to $105 per share. Alice's call option is now "in-the-money." She can choose to:
- Sell the option: Alice sells her call option, which is now worth at least $4.00 per share ($105 stock price - $101 strike price), plus any remaining extrinsic value. If she sells it for $4.50 per share, her profit before commissions is $350 (($4.50 - $1.00) x 100 shares).
- Exercise the option: Alice exercises her right to buy 100 shares of Company XYZ at the strike price of $101, paying $10,100. She can then immediately sell those shares on the open market at $105 for $10,500, realizing a $400 profit (before the initial $100 premium paid and commissions).
Had Company XYZ's stock remained below $101 by Friday's close, the weekly option would have expired worthless, and Alice would have lost her entire $100 premium.
Practical Applications
Weekly options serve a variety of practical applications for market participants seeking to implement short-term investment or hedging strategies. One primary use is for speculation around anticipated events, such as corporate earnings reports, economic data releases (e.g., jobs reports, inflation figures), or central bank announcements. Traders can take a directional stance on an underlying asset with a defined risk for a short period, potentially capitalizing on swift price movements following such events.
Another significant application is for short-term hedging of existing stock portfolios. For instance, an investor holding a large position in a stock might buy weekly put options on that stock to protect against a potential temporary decline in value over a few days, perhaps anticipating negative news. This allows them to limit potential downside risk without selling their shares.
The growing popularity of weekly options, including those with "zero days to expiration" (0DTE), has been a notable trend in recent years, with these short-dated options now accounting for a significant share of overall options volume8. This increased volume and liquidity in weekly options reflect their utility in both retail and institutional trading strategies, enabling precise execution around immediate market expectations7. Furthermore, regulators like the U.S. Securities and Exchange Commission (SEC) provide investor bulletins to educate the public on the fundamental aspects and potential risks associated with options trading, highlighting the importance of understanding these instruments before engaging with them6.
Limitations and Criticisms
Despite their utility, weekly options come with significant limitations and criticisms, primarily due to their extremely short expiration date. The most prominent drawback is the accelerated time decay they experience. As an option approaches expiration, its extrinsic value, which includes the time value and volatility, diminishes rapidly. For weekly options, this decay is compressed into a few days, meaning that if the underlying asset does not move sufficiently in the anticipated direction before expiration, the option premium can quickly evaporate, leading to a total loss of the initial investment for the option buyer.
Furthermore, the high leverage offered by weekly options means that both potential gains and losses are magnified. A small adverse price movement in the underlying asset can result in a disproportionately large percentage loss for the option holder. This inherent characteristic makes weekly options highly speculative and unsuitable for investors with a low tolerance for risk. Regulatory bodies like the Financial Industry Regulatory Authority (FINRA) highlight the significant risks associated with options trading in general, including the potential for substantial losses and the complexities of various strategies5. FINRA also emphasizes the importance of firms performing due diligence before approving investors for options trading, given the associated risks4. Fraudulent activities, such as account takeovers used to facilitate options trading, also pose a concern, as noted by FINRA2, 3.
Finally, while liquidity in major weekly options series can be robust, less popular or thinly traded weekly options may suffer from wide bid-ask spreads, making it difficult to enter or exit positions at favorable prices. This can exacerbate losses or diminish potential profits.
Weekly Options vs. Monthly Options
The primary distinction between weekly options and monthly options lies in their expiration cycles. Monthly options, often referred to as "standard" options, typically expire on the third Friday of each month, offering a longer time horizon, generally ranging from one month up to several years for Long-term Equity Anticipation Securities (LEAPS). In contrast, weekly options expire every Friday (or occasionally mid-week), providing a much shorter lifespan, usually around one to two weeks at the time of their listing.
This difference in duration leads to several practical implications. Monthly options are generally less sensitive to time decay on a day-to-day basis than weekly options, making them more forgiving for directional trades that may take longer to develop. They also typically have broader trading strategies, including calendar spreads and longer-term directional bets. Weekly options, by nature, are more volatile and experience rapid time decay, making them ideal for pinpointing short-term events or for strategies where a quick, significant move in the underlying asset is anticipated. Their tighter expiration window can lead to higher percentage gains on correct predictions but also faster, more complete losses on incorrect ones.
FAQs
What is the primary benefit of trading weekly options?
The primary benefit of trading weekly options is their short time horizon, which allows investors to position themselves for anticipated short-term events, like earnings announcements or economic data releases, with a relatively low capital outlay compared to buying the underlying asset. This provides significant leverage.
Do weekly options expire on a specific day?
Yes, weekly options typically expire on Friday at the close of the trading session. However, some instruments may have mid-week expirations, such as Monday, Wednesday, or Tuesday/Thursday, depending on the exchange and the particular options contract1.
Are weekly options riskier than standard monthly options?
Generally, yes. Weekly options are considered riskier than standard monthly options due to their accelerated time decay and higher sensitivity to changes in the underlying asset's price. If the expected price movement does not occur quickly, the option can lose value rapidly and expire worthless.
Can I buy weekly put options?
Yes, you can buy weekly put options. A put option gives the holder the right, but not the obligation, to sell the underlying asset at a specified strike price before or on the expiration date. This allows investors to profit from a decline in the underlying asset's price over a short period.
What happens if a weekly option expires "out-of-the-money"?
If a weekly option expires "out-of-the-money," it means the strike price was not reached or surpassed (for a call option) or fallen below (for a put option). In this scenario, the option becomes worthless, and the buyer loses the entire option premium paid.