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What are Weekly Options

30 Jun 2023

Introduction

Since its inception, options trading has remained a popular option in the stock market. It attracts several investors seeking higher rewards for their capital. As time passes, it is becoming more accessible with standardized contract terms.

As an investor, it is crucial that you also learn about weekly options, an option similar to standard options. Let's discuss the dynamics of these options, including their potential benefits, limitations, and characteristics. 

What are weekly options?

Weekly options are option contracts that have a shorter expiration period of a week. It has the same characteristics as monthly options. Traders can apply their strategies designed for monthly options to weekly options, benefitting from lower premiums due to the reduced time for expiry. Attractive features and flexibility make it a popular option amongst buyers and expiry-day traders.

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How do weekly options work?

Weekly options offer 52 expiration dates per year. This provides traders with more frequent profit opportunities compared to monthly options. When investors implement strategies from long-dated options, they can take advantage of the rapidly accelerating time decay curve. It is a lucrative choice for premium sellers aiming to use market dynamics for optimising returns.

What are the characteristics of weekly options?

Weekly options are characterised as:

  • Instant Changes

Compared to long-term options, weekly options exhibit higher sensitivity to changes in the underlying asset’s price. This makes them more responsive to volatility. It also exhibits heightened reactivity to price fluctuations, positioning weekly options as a preferred choice for traders seeking to capitalise on market volatility.

  • Smaller Premiums

For both put and call options, a shorter time to expiration results in smaller premiums. Opting for a weekly option expiring on the first and second Friday of the month means a lower premium. On the other hand, an option expiring on the third Friday can be relatively expensive. Selling options yield lower potential premium collections.

  • Faster Time Decay Rate

Weekly options exhibit higher daily time decay compared to longer-time options. As a result, the value declines faster as the expiration date approaches. This accelerated time decay serves as a crucial consideration for traders when managing their positions and evaluating the potential profitability of weekly options.

What are the advantages and disadvantages of weekly options?

Here are some of the key advantages and disadvantages of weekly options - 

Advantages

Weekly options provide the following advantages to traders:

  • Detailed Trades

Traders use market news and predictions available on trading platforms to make informed decisions and track market movements within the expiration date.

  • Cost-Effective

Weekly options generally have lower prices compared to monthly options. This means they are more cost-effective than shares and standard options. It is due to their shorter duration and increased volatility, which can indicate higher risk. Traders have limited time to observe the underlying stock and make predictions. So, they contribute this time to the lower cost and unique dynamics of weekly options.

  • Immediate Profits

In weekly options trading, traders exploit the volatility inherent in the shorter timeframe. Having similarities to standard options, the shorter duration allows for nimble position entry and exit. This increases the potential to manage losses and generate profits.

Disadvantages

Besides the advantages, traders should be aware of the following disadvantages as well:

  • Less Time for Trade Repair

The shorter time frame of weekly options provides limited opportunity to repair trades and the rapid time decay leaves little margin for error. If the underlying asset moves unfavourably, adjusting the strikes becomes extremely challenging for investors.

  • Wide Spreads

Weekly options generally exhibit good volume and open interest. But it is not universally applicable to every strike within the weekly series. Some strikes may have wide spreads, which can be disadvantageous for short-term strategies.

Conclusion

Weekly options allow traders to gain 52 returns per year, make informed decisions based on news, and enjoy numerous other advantages. Profitable trading in weekly options requires strategic planning. So, it is advisable to maximise opportunities through careful preparation and execution of your trading strategy.

 

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