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 firstname.lastname@example.org 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.
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