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Weekly Expiration: Looking At The Options Greeks

Weekly Expiration: Looking At The Options Greeks

As mentioned in an earlier post, the CBOE has added weekly options covering a select group of stocks, ETFs, and indexes. So it might be a good idea to see how these new options behave over their short life span.

Just to recap, the new CBOE weeklys let you buy or sell options that expire in about 7 days.

Options greeks refer to how option values respond to changes in underlying stock price, implied volatility, and time to expiration.

I created some graphs to compare the greeks for a longer-term call option (60 days to expiration) versus one with only a week until expiration. These are hypothetical calculations based on a 35% implied volatility.

First, here’s a chart of the theoretical value of longer-term and weekly $50 call options at various prices for the stock. As you can see, both are more vulnerable to change when the options are near the strike price – or when they are at-the-money.



So, let’s take a look at the greeks for these two types of call options.

Delta



“Delta” measures the rate of change of the price of the option. When the stock trades near the strike price, the delta is usually about 0.50, but this changes more rapidly when the option gets close to expiration.

Gamma



“Gamma” shows you how fast the delta changes. Essentially, it’s the slope of the option’s delta. The gamma of a longer-term option looks like a gentle hill. But when an option nears expiration, it turns into a sharp peak, showing how sensitive the delta can become when the stock is near the strike price.

Vega



“Vega” measures the impact of changes in implied volatility to the price of the option. As an option nears expiration changes in volatility have less of an impact.

Theta




“Theta” shows you the rate of time decay of the option. As an option nears expiration, time decay accelerates near the strike price. You don’t see as much time decay when your option is well below the strike price, but that’s because the option probably isn’t worth much and can’t decay much further.

Many options traders don’t closely monitor all these options greeks. But as you can see, if you’re trading weekly options, you might want to pay more attention – especially to delta and theta.

Important Note
While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.

The Greeks represent the consensus of the marketplace as to the how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that these forecasts will be correct.

While Delta represents the consensus of the marketplace as to the theoretical price movement of the option relative to the underlying security there is no guarantee that this forecast will be correct.

While Gamma represents the consensus of the marketplace as to the amount a theoretical option’s delta will change for a corresponding one-unit (point) change in the price of the underlying security there is no guarantee that this forecast will be correct.

While Vega represents the consensus of the marketplace as to the amount a theoretical option’s price will change for a corresponding one-unit (point) change the implied volatility the option contract there is no guarantee that this forecast will be correct.

While Theta represents the consensus of the marketplace as to the amount a theoretical option’s price will change for a corresponding one-unit (day) change in the days to expiration of the option contract there is no guarantee that this forecast will be correct.