The Road Goes on Forever
The Road Goes on Forever
One of the effects of the seasonality of options (that I talk a lot about with my students) is that premium sellers see the most dramatic erosion of the time value of options they have sold during the last week of the options cycle. Most premium sellers strive to keep the options they have sold short (also known as options they have ìwrittenî) out of the money (OTM) in order that the entirety of the premium they have sold represents time (extrinsic) premium and is subject to this rapid time decay.
With 12 monthly cycles, there historically have been only 12 of these final weeks per year in which premium sellers have seen the maximum benefit of their core strategy. The advent and widespread use of weekly options has changed the playing field. Options with one week durations are available on SPX and OEX indices. For variety, they also come in flavors of a mini contract (SPX) and European style (OEX). These options have been in existence since October 2005 but only in the past 12 months have they gained widespread recognition and achieved sufficient trading volume to have good liquidity.
Standard trading strategies employed by premium sellers can be executed in these options. The advantage is to gain the ìsweet spotî of the time decay of premium without having to wait through the entirety of the 4 to 5 week option cycle. The party never ends for premium sellers using these innovative vehicles.
Traders interested in using these weeklies MUST understand settlement procedures and be aware of last days for trading. An excellent discussion of details is provided on the CBOE website: http://www.cboe.com/micro/weeklys/introduction.aspx
About Dan Passarelli
Dan Passarelli, is the author of the book Trading Option Greeks and the president of Market Taker Mentoring LLC. Market Taker Mentoring provides personalized one-on-one mentoring for option traders. Dan started his trading career on the floor of the Chicago Board Options Exchange (CBOE) as an equity options market maker. He also traded agricultural options and futures on the floor of the Chicago Board of Trade (CBOT). In 2005, Dan joined CBOE’s Options Institute and began teaching both basic and advanced trading concepts to retail traders, brokers, institutional traders, financial planners and advisors, money managers, employees of the SEC and Federal Reserve bank, and market makers. In addition to his work with the CBOE, he taught options strategies at the Options Industry Council (OIC). Dan has been featured on television and radio and has written numerous articles in the financial press. Dan can be reached at dan@markettaker.com. He can be followed on Twitter.
View Dan Passarelli's post archive >
