New Research on Weekly Options
Sep 13, 2018
By: Sage Anderson
Since they were piloted in 2005, weekly options trading has steadily grown in volume, and in that regard are viewed as a positive addition to the equity options niche of the financial markets.
As a reminder, weekly options operate much like a regular "monthly" equity derivatives, except that their duration can range anywhere from one week to five weeks long - much as their name would indicate.
Because there can be several different weekly expirations to choose from for a given underlying, traders need to be extra careful when selecting a weekly option to ensure it possesses the desired expiration date.
While traditional "monthly" options expire on the third Friday of the indicated month, a weekly option obviously expires on the Friday of the week selected.
Traders should also keep in mind that weekly options are usually not offered for each and every week in a given month. Traders that want to stay current on upcoming weekly offerings in the options market can monitor the Options Clearing Corporation (OCC) website dedicated to updating information on forthcoming weeklies.
Depending on your unique trading strategy and risk profile, it's possibly you are already using weekly options, or at least have done so at some point in the past.
Today on the blog we’re highlighting a recent episode of Market Measures that compares the performance of a systematic short premium approach deployed in weekly options versus longer duration monthly options (i.e. targeting approximately 45 days-to-expiration).
This research is intended to illustrate the side-by-side historical performance of weeklies as compared to 45 days-to-expiration (DTE) options, and therefore may help you better understand how weeklies behave over time.
While this data is enlightening and may help you optimize your own strategy, it certainly shouldn't discourage your use of weeklies on a one-off basis, or however you may have incorporated them into your current strategic approach.
Moving on, let's briefly review the study that the Market Measures team conducted on weekly options. As stated earlier, the goal of the study was to compare a side-by-side backtest of a continuous trading approach that utilized options with 7 days-to-expiration vs. an approach incorporating options with approximately 45 days-to-expiration. The trading structure backtested for each approach was a simple short strangle in SPY.
The parameters of the study included:
Utilized data in SPY from 2010-2017
Short strangle (1 standard deviation)
Managed winners at 50%
Compared performance of:
options with 7 days-to-expiration
options with 45 days-to-expiration
The findings from these side-by-side backtests are compiled in the graphic below:
As you can see from the above performance statistics, the options with the longer duration (45 DTE) exhibited a higher win rate and a higher P/L (on average) as compared to the 7 DTE options. Additionally, the average buying power reduction (BPR) was also lower on average for the longer duration options.
Through a more extensive analysis of the results, the Market Measures team uncovered several important factors which appear to limit the performance of the shorter duration options, including:
Smaller trade credit, reducing breakevens
Less time for tested trades to bounce back
Lower overall trade performance (due to the above)
Due to the importance and complexity of this topic, we hope you’ll take the time to review the complete episode of Market Measures focusing on new tastytrade research on weekly options when your schedule allows.
As stated previously, this particular analysis centers on a systematic short premium approach over a long period of time - which represents only one of many different ways that weeklies might be utilized. If your own approach to weeklies has proven successful, we welcome you to leave any feedback in the comment section below, or by sending us an email at email@example.com to continue to discussion.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on tastyworks.com.
tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”). tastytrade is a trademark/servicemark owned by tastytrade.
Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on quietfoundation.com is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.
Small Exchange, Inc. is a Designated Contract Market registered with the U.S. Commodity Futures Trading Commission. The information on this site should be considered general information and not in any case as a recommendation or advice concerning investment decisions. The reader itself is responsible for the risks associated with an investment decision based on the information stated in this material in light of his or her specific circumstances. The information on this website is for informational purposes only, and does not contend to address the financial objectives, situation, or specific needs of any individual investor. Trading in derivatives and other financial instruments involves risk, please read the Risk Disclosure Statement for Futures and Options. tastytrade is an investor in Small Exchange, Inc.