InvestorQ : Are there are unique benefits that weekly options offer to traders?
sarah Leo made post

Are there are unique benefits that weekly options offer to traders?

Arusha Ray answered.
3 years ago

Let us try and understand the unique benefits that weekly options offer for traders and hedgers. While traditional monthly options expire on the last Thursday of the month, weekly options expire every Thursday. From the point of view of traders and hedgers, following are some of the key benefits that weekly options will proffer…

Today the minimum time period of hedging or trading that you can do is a 1-month option. What if you want to a trade shorter time frame? That is provided by weekly options where you can take positions for 1-5 days. This is a good measure for very short term traders in the market, since the premium cost for traders is also much lower. Also risk is lower.

Trading in the market is all about responding to economic data flows with speed. There are key data points each week like CPI data, WPI data, IIP data and trade data, all of which can have implications for banking stocks. Weekly options enable you to time the expiry around the actual event or the data announcement. This enables you to play the euphoria / disappointment surrounding the specific events more effectively and at a lower cost.

An important role that weekly options will provide is arbitrage opportunities across time frames. For examples, when events are concentrated during a particular week, you can create long/short positions by buying options in one week and selling the same options in another creating a spread. Also when you find mispricing, it is possible for you to create an arbitrage opportunity between the monthly option and the aggregate value of weekly options.

Weekly options offer you more trading cycles and thus give you an opportunity to diversify your risk. Any month, after all, is a series of discrete time intervals. Weekly options help you to capture each of these discrete time intervals and play them separately. This largely reduces your risk as a trader.

Traders and scalpers can also look at these weekly options as a means of earning short term returns. Today option writers have to write options in the beginning of the month and then typically wait till the end of the month to realize their return when the options expire worthless. Weekly options, on the other hand, allow these option sellers to monetize their positions faster and also churn their monies at a quicker pace.

Generally small investors have stayed away from option writing due to the risks involved. They have also been dissuaded from writing options. Option writing is more common among well-informed traders. Small and retail investors tend to keep away from options writing due to the higher margins it entails plus the higher time risk in writing monthly options. Weekly options largely obviate that risk. Weekly options have lower option premiums and that also lowers the return but also lowers the time risk. This can encourage many retail investors to participate in selling options.

Weekly options make the market efficient in terms of liquidity and price discovery. When you have short term options trading, the weekly time frame ensures that such options trade at finer bid-ask spreads. In fact, one of the signs of an efficient market is narrow bid-ask spreads. When the bid-ask spreads are narrower, markets actually become deeper and it is possible to execute trades with limited impact cost.