The Only Constant Is Change

Posted August 2nd, 2010 by Dan Passarelli in Trading & Analysis

The Only Constant Is Change

Options have traditionally traded in 12 cycles per year. Since there are 52 weeks per year, most monthly cycles have had a life span of 4 weeks with the occasional 5 week cycle in order to make the math work out. In these multi-week cycles, each week tends to have its own personality and the tempo of price change would often accelerate as expiration approached. This effect was at least in part the result of the non linear nature of the decay curve of extrinsic premium. It is as if the option cycle began with a decay curve akin to an easy green ski trail and ends on a double black diamond slope.

For strategies that include a component of being short premium, the maximum potential total profit or loss is only achieved at expiration. This effect is easily seen in the case of vertical spreads which only reach their maximum potential gain or loss at expiration or when the spread goes deep in-the-money or out-of-the-money.

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CBOE introduced weekly options in 2005 on several broad indices and the launch was met with a tepid reception. However, trading volume in weekly options contracts has recently exploded, additional indices and ETF underlyings have been added, and recently a number of actively traded equities have joined the family of weekly options. An updated list of the rapidly increasing available weeklies can be found at this CBOE site: http://www.cboe.com/micro/weeklys/introduction.aspx

Weekly options are a rapidly evolving and changing part of the options world. As an example of this rapid evolution, the new weekís options have begun to be offered on the Thursday of the week prior to expiration rather than the Friday as had been the case previously effective July 1, 2010.

The availability of weekly options will undoubtedly have significant impact on a variety of strategies. Their acceptance and increase in trading volume has been nothing short of stunning. For example, the 260 and 270 call strikes in AAPL that will expire tomorrow, July 30, each have an open interest of around 10,000 contracts.

The future isnít what it used to be."

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.

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