With the rising popularity of stock option strategies and covered call writing in particular, we have seen the creation of more option products like weekly stock options. Weeklys expire each Friday of the month whereas the more traditional monthlys generally expire only on the 3rd Friday of each month. Weeklys fall into one of two categries: standard weeklys or expanded weeklys. In the last quarter of 2012, the options exchanges received regulatory approval for extended Weekly expirations. The options exchanges can now list up to five consecutive Weekly expirations for selected securities. Although any product with Weekly expirations can be part of the extended Weekly program, the exchanges will typically select the most actively traded options.
If the regular monthly expiration is three weeks away, then investors would most likely see Weekly, Weekly, Monthly, Weekly and Weekly expirations listed over a five-week period. There are no new Weeklys added that would expire during the expiration week for traditional monthlys, which is typically the third Friday of each month, nor are they even listed if they would expire on the same date as a Quarterly option on the same underlying security. Quarterlys are options that expire at the ends of quarters.
With so many more choices than we previously had available I thought it would be interesting to evaluate the returns for 1,2,3 and 4-week options on the same underlying securities and then annualize those returns to give us a sense as to which time frame may be in our best interest. Although this is far from a long-term scientific study, I did find the results interesting as a preliminary view into the world of weekly stock options. Here’s how I set things up:
I selected 2 stocks from our Premium Stock Report dated 7-18-14
- These stocks had to have expanded weeklys associated with them
- Neither stock could have an upcoming earnings report prior to expiration
- Data was taken immediately after expiration of the July contracts
- 1,2,3, and 4-week options were calculated
- The 2 stocks selected were SWKS and TTM
Here are the results as shown in the “multiple tab” of the Ellman Calculator:
Summary of results
- The options in weeks 1 and 2 showed slightly higher returns than those in weeks 3 and 4 for both stocks
- Is this small difference enough for us to favor weeklys over the more traditional monthlys?
In my humble opinion
From this initial, admittedly cursory, view of weekly calculations there appears to be no clear reason for favoring weeklys or monthlys based on annualized returns although the weeklys in weeks 1 and 2 did slightly outperform. Therefore, I would make a decision based on an overview of the pros and cons of weeklys as compared to traditional monthlys.
Pros and cons of weeklys as I see them
- Annualized returns can be higher
- Can avoid exposure over weekends
- Can generate greater premium as earnings report dates are approached and trade up to the week before earnings
- The pool of stocks with weeklys is much smaller than those with monthlys
- Management is much more time-consuming as “rolling” possibilities come up every week
- Less time for exit strategy execution
- Quadruple the number and amount of trading commissions
- Lower option liquidity
- Wider bid-ask spreads
There are many ways to make money in the stock market and using weeklys is certainly one of them. There is no one strategy appropriate for every single investor so when deciding between weeklys and monthlys we must make sure we understand all the nuances (pro and con) associated with each choice to come to the conclusion that is in our personal best interest.
BCI WEBSITE NOW IN 80 LANGUAGES:
Because we have members from over 90 countries my fabulous team just added a new feature located under the google search tool at the top of our web pages where the site can be viewed in over 80 languages. However, expect responses from me to only be in English!
Those members who have followed our site over the years know how much emphasis I put on our real estate market as it relates to our overall economy. This is, to a great extent, related to the fact that I am an active investor in real estate, my 2nd favorite investment venue. In the past 2 months, the real estate data has been troubling, muting my aggressiveness in my covered call positions (along with geo-political events). This week, the real estate data was quite encouraging:
- New home construction rose by an impressive 15.7% in July, after 2 consecutive months of declines. This exceeded analyst’s projections and June statistics were also revised upward. Both multi- and single-family homes participated in the rise
- Building permits were also up by 8.1% and completions were up by 3.7%
- Housing starts are up 21.7% year-over-year
- Economists are watching how the housing market responds when the Fed begins raising short-term interest rates
- Sales of existing homes went up by 2.4% in July to an annualized 5.15 million, much better than analyst expectations (5.02 million)
- Existing home sales have been up 4 months in a row and on its best pace this year
- The median price of existing homes is up 4.9% year-over-year
- Minutes from the July FOMC meeting shows that despite an improving employment picture and slightly rising inflation, members are uncertain when short-term interest rates will increase. This rate has been between 0 and 0.25% since December, 2008 (sorry I had to mention that year)
- According to the Labor Department, the Consumer Price Index (CPI), a measure of inflation, was up very slightly by 0.1% in July, a smaller increase than the previous 2 months
- The Conference Board’s index of leading economic indicators increased by 0.9% in July, well above the 0.4% expected. This was the 3rd consecutive rise and 11th in the past 12 months
For the week, the S&P 500 rose by 1.7%, for a year-to-date return of 9%, including dividends.
IBD: Confirmed uptrend
GMI: 6/6- Buy signal since market close 8/15/14
BCI: Moderately bullish, favoring out-of-the-money strikes 3-to-1
Thanks for all your amazing support,
Alan ([email protected])