SPX Weekly Options Bonanza: Why Should You Trade Them?

Articles From: Cboe Global Markets
Website: Cboe Global Markets

You’re probably familiar with weekly options for single-name equities and exchange-traded funds (ETFs). But are you aware of how retail traders can use weekly options on the S&P 500 Index (SPX) for the same strategies as big institutions—and more? With the recent addition of Tuesday and Thursday expirations, there’s now an SPX option contract expiring every day of the week. And that opens the door for more trading flexibility.

A Deeper Dive into SPX Weeklys Options

Weekly options are similar to standard monthly options except they have a shorter life span. SPX Weeklys index options are PM-settled on their expiration date, whereas standard (third Friday) options contracts are AM-settled. Weeklys are typically listed several weeks in advance, which gives you more options expirations to choose from when making strategy decisions.

Here are a few things to keep in mind about SPX Weeklys options:

  • The multiplier. One contract equals $100 times the index level. 
  • Options exercise. SPX Index options are European-style contracts. They can only be exercised on the expiration date, so that eliminates the risk of early exercise.
  • Settlement. SPX Index options are cash-settled. They’re based on the calculated value of the S&P 500 Index, which can’t be bought or sold like a stock or ETF. As a result, SPX options settle in cash based on the index value at the time the options expire. Unlike options on an ETF or stock, there is no physical delivery to deal with.
  • Quick price changes. Because of the short-term nature of the weekly contracts, price moves in the index could have a big impact on the options prices. In options-speak, you would say weeklys have a higher gamma.
  • Accelerated time decay. The less time to expiration means daily time decay is higher as expiration approaches—high theta, in options-speak. 
  • Tax benefits. SPX Index options have a tax advantage. They’re a section 1256 contract and are taxed at 60% long-term capital gains and 40% short-term capital gains.

Three Reasons to Consider Trading SPX Weekly Options

Because of their short-term nature, your first thought might be that weekly options are risky. There’s no denying they can be volatile. Because of their high gamma, a small move in the index could end up being a large move in the options price. That means you could get large gains or losses within a few days—or a few hours. If the index doesn’t move in your favor, there’s only so much time for it to change direction. Within a few days you’ll know if you made or lost money. It goes without saying that trading weekly options requires disciplined risk management.

But the flip side of risk is opportunity. If that price action is what you’re looking for, SPX Weeklys can be a flexible and cost-effective way to pinpoint your strategy, particularly if you’re looking at specific market events.

Here are three attributes of weekly options to consider. 

#1. Lower Premiums

Because they have fewer days to expiration, weekly options premiums are lower than those of longer-term options contracts. So, when you’re considering which options to trade, keep in mind an option that expires in the first week of a month is likely to have a lower premium outlay than a standard option that expires on the third Friday of the month. This gives you the opportunity to apply short-term trading strategies in a more cost-effective way.

If you use a short-options strategy, the premium you collect will be lower relative to longer-term options. However, short-term options tend to decay at a faster rate than longer-term options—an enticement to traders seeking to maximize theta.

#2. Target Exposure to Specific Dates

With SPX Weekly options expiring every day of the week, traders have more opportunities to apply short-term strategies to target specific expiration dates. The dates could align with events that are likely to impact the S&P 500. This includes FOMC announcements, economic reports, weeks during earnings season when the top-weighted companies in the S&P 500 announce earnings or any other date-specific key events.

More expiration dates mean more opportunities for traders to find the exact strike prices and target dates for your calls, puts and spreads.

#3. Apply Short-Term Strategies

You could apply just about any options trading strategies to weekly options, but because of the risk dynamics, traders can take advantage of short-term market moves.

Maybe you think the S&P 500 could have a big up or down move based on an economic report. Depending on your directional bias, you might want to buy a weekly call or put option. If you think there may be a large move in the index but aren’t sure of the direction, you could consider trading straddles or strangles. Or if you think the market has already priced in a large move, you may want to sell options or options spreads to try to profit from the enhanced time decay.

The Bottom Line

With SPX Weeklys options expiring every day of the week, you could have potential trading opportunities daily. But they can be risky—you either make or lose money. Trading weekly options could be a good test of your risk management skills.

Ready to learn about different trading strategies using SPX Weeklys options? 

Originally Posted June 23, 2022 – SPX Weekly Options Bonanza: Why Should You Trade Them?

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