Option Investor
Trader's Corner

Opex Action Every Week of the Month

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Friday, October 28, strange symbols appeared on OEX and SPX options chains. Those symbols had nothing to do with the approach of Halloween. They didn't signal a glitch in the CBOE platform. They heralded the launching of the "WeeklysSM," the title of a new type of option that is listed one week and expires the next. If you want cheap options and the thrill of option expiration action every week, these are the options for you.

Offered for the time being only on the OEX and SPX, these options are listed on Friday and expire the next Friday. The CBOE does not list new Weeklys that would expire during expiration week for standard options, but you don't need them then. You have the real-deal option expiration.

According to the CBOE's press statement, the exchange wanted to offer a product that provides "an efficient means to trade options around specific time periods or certain news or events." I suspect that the CBOE also intends to increase options buying and selling, but that goal wasn't mentioned in the press release.

Like their familiar counterparts for the OEX and SPX, weekly options are cash settled. The CBOE set up the SPX Weeklys as European style and the OEX, American style, matching the standard options on these indices. SPX Weeklys stop trading on Thursday before their settlement and settle when all SPX components have opened Friday morning. OEX weeklies trade through Friday, and settle when all OEX components have closed Friday afternoon.

The CBOE created new symbology for the Weeklys, with the symbology recycled for each month. The first two letters of the option symbol will be "JX" for the SPX Weeklys and "RZ" for the OEX ones. Those first two letters will be followed by "A" for week 1, with those options listed the last Friday of the month prior to each expiration month. For example, the SPX Weeklys listed on that October 28 launch date carried the first three letters "JXA." Listed the last Friday of October, they stopped trading Thursday, November 3, and the cash settlement was determined upon the opening of all the component stocks the morning of Friday, November 4.

"B" serves as the third letter for week 2, listed the first Friday of an expiration month; "D" for week 4, listed the third Friday of each expiration month and "E" for week 5, listed on the fourth Friday of those expiration months that might be a 5-Friday month. Because standard options typically expire the third Friday of each month, no Weeklys would be listed the second Friday of each expiration month, because those would expire at the same time as standard options.

An interesting situation occurs with the American-style OEX Weeklys. Because OEX options trade through Friday and settle at the close of the day, the expiring and newly listed Weeklys overlap for several weeks of month. They do not do so the week before option expiration, because the CBOE does not list new Weeklys that week. This situation does not occur with the SPX Weeklys with their European-style exercise, since they stop trading on Thursday.

Because there's little time value built into Weeklys, they're cheaper than standard options. Those cheap options prices will appeal to many traders. The following chart compares bid, ask, and delta for a slightly ITM put and call for Weeklys and standard November options as of the close of trading Friday, November 4, when the OEX had a value of 561.97.

Comparing Price and Delta on Weeklys versus Standard Options

Bid and ask prove noticeably lower on the Weeklys, and the difference would be more pronounced earlier in the option expiration cycle for the standard options. Interestingly, delta, the ratio that predicts how much an option price would change for each one-point change in the price of the OEX, proves slightly higher for the Weeklys, too. This provides the more-bang-for-the-buck action previously seen only during option expiration week.

Weeklys also provide much of the danger. One danger comes from the quick decay that occurs with an option moving quickly toward expiration, as all have observed options prices do during option expiration week. Anyone trading about-to-expire options the last week of the option expiration cycle has observed the price visibly decaying if the index price did not move quickly in the right direction.

If an adverse move occurs, the effect can be worse and little time for recovery remains. On November 3, news of a Merck victory in a Vioxx case spiked MRK's stock and helped spike the OEX, too. The MRK news hit at about 10:15. That morning, the OEX had opened, climbed and then begun rolling over, with the advdec line volume doing the same. Both had reached potential support, and the MRK news helped the OEX support to hold despite the rollover in the advdec line. The short-term bearish OEX traders who though they'd found a great entry were to see the OEX spike to a new high of the day before finally tumbling, with that spike stopping out some bearish traders. Fortunately, for those not stopped by the Merck-driven spike, a profitable exit was eventually offered, but Weeklys provide little time for recovery from such a news-driven event.

Of course, the Weeklys don't offer all the excitement and frustrations of an opex week, since they're the only expiring options. For those who crave the danger of an opex week, however, they offer danger in another form other than limited recovery time: limited liquidity when compared to standard options. The following two charts showing RZA and RZB (Week 1 and 2) OEX options at the close of trading Friday, November 3, as the Week 1 class was expiring, display low open interest when compared to standard options.

Weeklys: OEX Calls

Weeklys: OEX Puts

The current week, ending November 11, shows little or no improvement over the previous Friday's results. With the OEX at 567.49 as this report was completed, the nearby Weeklys showed 555 open interest and 44 volume for the 565 calls and 648 open interest and 7 volume for the 565 puts.

The Weeklys also do not offer enough strikes to be particularly useful for those who prefer out-of-the-money credit spreads. As the two tables above illustrate, only five strikes are currently offered in each class.

They perhaps do a much better job at meeting the CBOE's stated purpose of offering an efficient method of trading near an important development that might occur any week, and not just during the expiration week for standard options. Perhaps these options will be welcomed by those heavily short or long a portfolio into a FOMC meeting, a GDP announcement or a controversial vote in the Senate that has economic weight, whether or not such developments take place during opex week.

Weeklys offer advantages, including a cheaper price and that intended ability to efficiently trade around potentially market-moving events. For now, few strikes and lower liquidity relative to other SPX and OEX options remain drawbacks to directional traders or those seeking OTM credit spreads, but keep them on your radar screen.
 

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