Weekly vs Monthly Options

Discussion in 'Options' started by moolah, Apr 9, 2019.

  1. moolah

    moolah

    What is the difference between a weekly and monthly option? I don't seem to see any difference, which i know i am wrong.
     
  2. rb7

    rb7

    As their names suggest, weeklies expire each week, monthlies each month.
     
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  3. tommcginnis

    tommcginnis

    "Right click" (from anybody's trading platform) and you should have a summary sheet pop up stating American or European option, or describing the precise date/time of expiration and what/how ITM options expire into (whether cash, stock, physical delivery -- various terms). Outside of equities, these things can change without a lot of fanfare, so always be aware.

    One thing to notice is that, roughly: weeklys will be available roughly one month before expiration, monthlies will be available roughly one year before expiration. With all that extra time, monthlies tend to have multiples more of trading volume than weeklys. SOMETIMES that will mean tighter bid-ask spreads, and oddly, sometimes not. (But whatever pattern you see tends to be contract-specific, so it sticks over time.) Keeping an eye on daily volume traded and open interest of different contracts shows a lot of this.

    So, the best answer to your question might really be, "It depends." and to go write down the characteristics of what you usually trade, study it for a month or three, and then see what has been consistent and what has not.
     
  4. For some, such as index options, it is best to lookup the source and determine the specific differences.
    For example: SPX monthly options are AM settled, where the weeklies are PM settled. That distinction is very important if you hold/trade the option near expiration!
     
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  5. Sig

    Sig

    And "AM settled" doesn't just mean it settles in the AM, it also means they use a potentially non-intuitive method of settling which means the settlement can be a price that the index never trades at that day.
     
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  6. ironchef

    ironchef

    I don't quite understand exactly what you were saying? An example would be nice.
     
  7. Sig

    Sig

    I'd recommend reading the settlement process. Basically they take the first trade price of every stock in the index so if a stock doesn't trade until 20 minutes into the session and the index has moved alot, that stock (and others like it) will lead to unexpected results on the settlement price. There have been cases where the settlement price is lower or higher than the index ever traded at that day, and randomly you get hit with a settlement that is at the very least very different from the open.
     
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  8. tarifa888

    tarifa888

    The AM settlement reflect where the correct cash index price opened, same as PM settlement reflecting the correct cash close. If you unwind a basket of shares that replicate the S&P in the opening or closing you will be executed on the first paid price or for the closing on the last paid price on each share and that reflect the settlement price that matches your offsetting option expires. With any other procedure you have huge settlement risk on an index vol book. To unwind your future hedges against PM close you can use BTIC (Basis Trade at Index Close) contracts that are listed, for the AM its OTC agreed in the broker market or you just let your future hedges expire if you are in the normal future expiry cycle. By doing this you will trade the futures at the AM/PM cash settle minus/plus the future basis depending on the underlying.
     
    Last edited: Apr 11, 2019
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  9. ironchef

    ironchef

    Thank you for your explanation.

    For us retail traders trading a few SPX contracts at a time do we really have to worry about this? Seem to me other costs like bid/ask, commissions overwhelm this factor?
     
  10. Sig

    Sig

    As long as you aren't holding into expiration and more importantly not hedging something else with it you're right, it's a second order issue. It really bites you if you think you have a perfect hedge and you don't.
     
    #10     Apr 11, 2019