Investors can use options trading to take positions according to their expectations regarding the movement of an underlying asset without having to buy or sell it directly. Weekly options go a step beyond this by providing traders with contracts which have a considerably shorter expiry period.
Weekly options, unlike monthly ones, have a shorter lifespan and respond more rapidly to changes in the price of the underlying asset, in market sentiment, and in volatility. This can provide opportunities for short-term traders, but it also allows less room for error.
Key Takeaways
- Weekly options are short-term contracts which are intended for traders who have a short-term view of the market.
- Due to their shorter duration, these policies usually have lower premiums than longer-dated ones.
- As the expiry date nears, the effect of time decay increases and could thus cause the option's value to drop quickly.
- Weekly options are suitable for use with trend-based, range-bound, and short-term trading strategies.
- In the Indian derivatives market, weekly option contracts are restricted to one benchmark index per exchange: Nifty 50 on the National Stock Exchange (NSE) and SENSEX on the Bombay Stock Exchange (BSE).
What are Weekly Options?
Weekly options are short-term option contracts which have the same basic structure as other types of options but differ in that their expiry date is weekly. They give traders the right, though not the obligation, to buy or sell the underlying asset at a predetermined strike price, according to whether the contract is a call or a put option.
The main difference lies in the time allowed before the option expires. A monthly option can remain in effect for several weeks, whereas a weekly option has a considerably shorter lifespan.
Weekly contracts are usually introduced on a weekly basis and remain in force for a short time, leading to more frequent opportunities for expiry than in the case of monthly contracts.
The specific timetable for expiries and the contracts that are eligible will vary according to the exchange and its current rules.
This shorter time frame means that for traders, market movements, news, and changes in volatility can cause a considerable effect on the option premium in just a few trading sessions.
How do Weekly Options Work?
The way in which a weekly option functions is just like that of a regular option. Imagine a trader who anticipates that an index will go up over the coming few trading sessions, they might then buy a call option which expires weekly.
Should the underlying index move in the anticipated direction, the call option could increase in value. But if the index fails to move as expected, the option might suffer a quick loss in value since there is a limited amount of time left before expiry.
A trader who expects the price to fall might choose to buy a put option. The important factors include:
- The asset upon which it is based is the security or index from which the option obtains its value.
- The strike price is the fixed price at which the option can be exercised, provided that the contract terms allow it.
- The premium is the amount paid by the buyer of the option.
- The expiry date is the date by which the option contract expires.
- Volatility refers to the extent of fluctuations that the price of the underlying asset is expected to undergo.
Since weekly options have less time remaining until expiry, these factors can cause their prices to change quickly.
Why do Weekly Options Have Lower Premiums?
A principal feature of weekly options is that their premium is relatively lower than that of longer-duration contracts. An option which has more time before it expires has more time in which the underlying asset can move favorably.
A weekly option, on the other hand, has a much shorter period, and this shorter time can cause the amount paid by the buyer for the premium to be reduced.
For example, suppose that two call options are otherwise identical and have the same strike price; one of them expires in a few days while the other expires several weeks later.
The option with the shorter time to expiry might have a lower premium since there is less time in which the expected price movement can take place.
It is important not to regard a lower premium as indicating lower risk. Weekly options can suffer sudden percentage changes in value since their expiry is so near.
How Does Time Decay Affect Weekly Options?
One of the most important factors to consider when dealing with weekly options is time decay.
As an option's expiry date nears, its time value usually decreases. This decrease is referred to as time decay or theta. The effect is especially apparent in the case of weekly options since there are only a few days left in which the option can keep its time value.
As expiry gets closer, time decay can accelerate. This creates a difficult situation for option buyers. Even if the underlying asset moves slightly in the expected direction, the option may not gain enough value to offset the loss caused by time decay.
For those who sell options, faster time decay may be to their advantage if the underlying asset stays within the anticipated range. Yet the sale of options can lead traders to suffer substantial losses should the underlying asset make a sharp move.
Steepest Part of the Theta Curve: Weekly options reside directly on the steepest part of the Theta decay curve. While time decay is gradual weeks out, it accelerates exponentially in the final 48 to 72 hours before expiry, wiping out remaining time value at an aggressive pace.
What are the Advantages of Weekly Options?
There are a number of features about weekly options that make them useful to short-term traders.
- Lower upfront premium: Weekly options often cost less than comparable longer-duration contracts because they have less time remaining before expiry. This can reduce the initial premium required to take a position.
- More frequent trading opportunities: Weekly expiry cycles provide traders with more opportunities to structure short-term positions. Instead of waiting for a monthly expiry, traders can take positions around different weekly market events and price movements.
- Faster response to market movements: Weekly options can react quickly to changes in the underlying asset. This can be useful when traders have a clear short-term view on market direction.
- Potential for short-term hedging: Weekly options can also be used to hedge an existing position for a shorter period. A trader may use a suitable put or call to manage exposure around a specific market event or expected period of volatility.
What are the Risks of Weekly Options?
| Risk | What it means |
| Faster time decay | The option can lose time value rapidly as expiry approaches |
| High price sensitivity | Small changes in the underlying asset can cause large changes in the option premium |
| Wide spreads | Some strikes may have a significant gap between their buying and selling prices |
| Limited time to recover | A losing position has fewer days to reverse |
| Higher volatility | Prices can move sharply during short-term market swings |
| Gamma Risk | High Gamma near expiry means small price fluctuations in the underlying benchmark index can cause extreme, nonlinear percentage swings in At-The-Money (ATM) weekly options. |
| Regulatory Margin (ELM) | SEBI mandates strict margin frameworks, including an additional 2% Extreme Loss Margin (ELM) on short option positions on contract expiry days, alongside 100% upfront premium payment requirements for long options. |
Weekly options therefore require close monitoring. A trade that goes against expectations may leave little time to adjust the position.
What Strategies are Available in the Case of Weekly Options?
The strategy is based on the trader's perception of the underlying asset and the market conditions that are expected.
- Trend-following strategy: A trader can identify the prevailing trend and take a position based on the expected direction of the underlying asset. Weekly charts, price trends, and support or resistance levels can help form the market view.
- Range trading strategy: If an asset is moving within a defined range, traders may identify its support and resistance levels and structure option positions around those levels.
- Weekly highs and lows: Previous weekly highs can act as potential resistance, while weekly lows may act as potential support. These levels can help traders identify possible entry and exit points.
- Hedging strategy: Weekly options can also be used to provide short-term protection against an adverse movement in an existing portfolio. The choice between a call and put depends on the nature of the underlying exposure.
How are Weekly Options Different From Monthly Options?
| Factor | Weekly options | Monthly options |
| Expiry cycle | Weekly | Monthly |
| Contract life | Shorter | Longer |
| Premium | Generally lower | Generally higher |
| Time decay | Faster | Relatively slower |
| Price sensitivity | Higher in the short term | Generally lower than weekly contracts |
| Time to adjust a position | Limited | More time available |
Are Weekly Options Suitable for Every Trader?
No. Weekly options are designed for short-term market exposure and can involve rapid price changes.
Before taking on such positions, a trader should understand option pricing, time decay, volatility, and the way in which the underlying asset behaves. It does not automatically follow that the weekly option's lower premium makes it a safer product.
Since the expiry is short, both profits and losses can be magnified. Traders who are unable to keep a close eye on their positions or who are uncomfortable with quick changes in the value of options may find weekly options hard to manage.
Conclusion
Weekly options offer a more straightforward way of getting into options trading since they have more frequent expiry cycles and usually carry lower premiums than longer-dated contracts. The same feature that makes them most attractive is also their greatest risk: the short period of time before expiry.
Because of faster time decay, sharp changes in price, fluctuating volatility, and the limited time available to recover from a losing trade, weekly options can be difficult to deal with. It is necessary to have a clear understanding of the strike price, the premium, the expiry date, and the current market conditions before taking a position.
