Russell Rhoads - Trading Weekly Options + Online Video Course: Pricing Characteristics and Short-Term Trading Strategies

CONTENTS

T RADING W EEKLY O PTIONS

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T RADING W EEKLY
O PTIONS

Pricing Characteristics and
Short-Term Trading Strategies

Russell Rhoads, CFA

Cover image: iStockphoto.com/causeandeffectAU
Cover design: Wiley

Copyright 2014 by Russell Rhoads. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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ISBN 9781118616123 (Hardcover)
ISBN 9781118727171 (ePDF)
ISBN 9781118727386 (ePub)

To Maggie
You always inspire me to do better than
anyone would have ever expected.

PREFACE

S hort-dated options have taken off in popularity since being introduced on stocks and exchange-traded funds in the summer of 2010. By some accounts, up to 20 percent of daily trading volume may be attributed to these options. Short-term stock traders who shied away from options have come to embrace the shorter-dated contracts. Also, historically, there have been certain trading strategies that would only be implemented the week of expiration. Now every week is expiration week for options on almost 200 markets!

The first half of this book introduces or reviews option-pricing factors and characteristics of option trading when contacts have just a few days remaining until expiration. Time decay and time value are very different near expiration than when options have weeks or months remaining until expiration. The second half of this book discusses strategies and how they may be implemented using options with just a few days remaining until expiration. Also discussed are strategies that combine longer-dated options with contracts that have a few days remaining until expiration. Short-term stocks and option traders should be trying to take advantage of the time-decay characteristics of short-dated options and this book highlights methods to do so.

Finally, visiting the website that accompanies this book is strongly encouraged. The website highlights some advanced strategies that combine contracts on unique exchange trade funds along with a consistent update on short-term events, such as earnings announcements, that may offer short-term, catalyst-trading opportunities. See the About the Website section for more information about the website.

ACKNOWLEDGMENTS

T he opportunity to write this book would not have come to me without a tremendous amount of help from Kevin Commins. I will be forever indebted to him for giving me the opportunity to work with Wiley. Meg Freeborn has been a patient guide for the third time and I appreciate her patience with this project.

I am very fortunate to work with a wonderful group of people at the Options Institute. In alphabetical order: Taja Beane, Jim Bittman, Laura Johnson, Barbara Kalicki, Michelle Kaufmann, Mary Kearney, Peter Lusk, Pam Quintero, and Deb Peters are a wonderful group to work with. Also the past two summers I have had wonderful interns. Both Sean Knudson and Allison Michel were helpful with this book. The combination of all these people has enabled me to set a longevity employment record at the CBOE.

Finally, at home I promise Merribeth, Maggie, and Emmy that this is the last summer with no vacation because Im busy writing a book.

CHAPTER 1

Introducing Weekly Options

Evolution of Weekly Options

On Friday October 28, 2005, the Chicago Board Options Exchange (CBOE) launched the first weekly contract. Weekly contracts were first launched in 2005 on the S&P 500 (SPX) and S&P 100 (OEX) market indexes. The popular thinking, however, is that weekly, or short-dated, options have only been available since the summer of 2010 because many traders focus on equity options and only became aware of short-dated options when they became available on stocks. Weekly options on exchange traded funds followed shortly after short dated options on stocks the following month. When shorter dated options in equities and exchange-traded funds (ETFs) hit the markets in 2010, many more traders started to pay attention to these contracts and rapid growth in trading volume quickly followed.

Weeklys is a term that is specific to options trading at CBOE and is actually a service mark of CBOE. However it is a term that seems to have taken on general meaning for all short dated option contracts. Other option exchanges list short-dated options as well but they use different terminology. For instance, the NYSE ARCA Options exchange uses the term Short Term Options Series. Other than the name, contracts listed at this exchange or any other option exchange that start trading on Thursday and expire the following Friday have all the same characteristics as weeklys.

From 2005 until 2010 SPX and OEX Weeklys were the only weekly option contracts listed at CBOE or any other options exchange in the United States. Toward the end of this five-year period that precedes the introduction of equity weeklys in 2010, the average daily volume of SPX Weeklys was around 16,000 contracts and the average daily volume of OEX Weeklys was just over 15,000 contracts. In late 2012 the average daily volume for SPX Weeklys had jumped to 100,000 contractssome days with volume topping 200,000 contracts. Also, as a percentage of total SPX option trading, short dated SPX options had grown to over 20 percent of average daily volume as of late 2012.