SM

Weeklys Options and

Short Term Strategies

Russell A. Rhoads, CFA

CBOE Disclaimer

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Options. Copies may be obtained by contacting your broker by calling 1-888-OPTIONS,
or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago,
Illinois 60606. In order to simplify the computations, commissions, fees, margin interest
and taxes have not been included in the examples used in this presentation. These costs
will impact the outcome of all stock and options transactions and must be considered
prior to entering into any transactions. Multiple leg strategies involve multiple commission
charges. Investors should consult their tax advisor about any potential tax consequences.
The information in this presentation, including any strategies discussed, is strictly for
illustrative and educational purposes only and is not to be construed as an endorsement,
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Copyright © 2010 Chicago Board Options Exchange, Incorporated. All rights reserved

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Outline
Weeklys Options Time Spreads
• Description • Strategy
• Index • Weeklys Options
• Stock / ETF Diagonal Spreads
Time Value of Options
• Theta • Strategy
• Weeklys and Time • Weeklys Options
Covered Calls Funding a Position
• Strategy • Explanation
• Weeklys Options • Weeklys Options
Summary / Q&A

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Weeklys Options

• Begin trading on Thursday for the

following Friday expiration
• Currently trading on indexes, ETFs, and
equities
• Parameters for settlement and expiration
are the same as standard options
• Have a very short life so suited for shorter
term strategies

CHICAGO BOARD OPTIONS EXCHANGE

Weeklys Options
Index Options –
SPX, DJX, OEX, XEO

ETF Options –
SPY, QQQ, IWM, GLD,
XLF, EEM, FAS, FAZ

Stock Options –
C, BAC, AAPL, BP, F,
GOOG, AMZN, MSFT

*As Of July 16, 2010

CHICAGO BOARD OPTIONS EXCHANGE
Weeklys Options

Index Options –
• SPX, OEX, XEO have been trading since 2005
• DJX just added (July 16, 2010)
• SPX & DJX are AM settled and cease trading
on Thursday
• OEX and XEO are PM settled on Friday
• OEX is American style, others European style
• SPX volume is steady, dropped with SPY
introduction

CHICAGO BOARD OPTIONS EXCHANGE

 Weeklys Options

S&P 500™ Weeklys Option Average Daily Volume –

30,000

25,000

20,000

15,000

10,000

5,000

0
Jan Feb Mar Apr May Jun

Source: cboe.com
CHICAGO BOARD OPTIONS EXCHANGE
Weeklys Options

ETF / Stock Options –

• Began trading in June
• Trade Thursday to the following week’s
Friday
• American style like all equity options in the
US
• Currently there is a limitation on strikes
• Interesting opportunities with limited life of
options
CHICAGO BOARD OPTIONS EXCHANGE
Weeklys Options

SPY Weeklys Option Daily Volume –

120,000

100,000

80,000

60,000

40,000

20,000

0
6/4/2010 6/9/2010 6/18/2010 6/23/2010 6/28/2010 7/1/2010

Source: cboe.com
CHICAGO BOARD OPTIONS EXCHANGE
Weeklys Options

AAPL Weeklys Option Daily Volume –

20,000

15,000

10,000

5,000

0
6/25/2010 6/29/2010 7/1/2010

Source: cboe.com
CHICAGO BOARD OPTIONS EXCHANGE
Time Value of Options

• When selling options a benefit is the loss

of time value
• For at the money options, time value does
not deteriorate at a linear pace
• The loss of value accelerates as expiration
approaches
• Based on strikes this deeply impacts
options with little time to expiration

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Time Value of Options
Time Value Behavior -

2.50
In The Money

2.00 At The Money

Out Of The Money

1.50

1.00

0.50

0.00
120 100 80 60 40 20 0

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Time Value of Options
Time Value Behavior -

1.50
In The Money

1.25 At The Money

Out Of The Money

1.00

0.75

0.50

0.25

0.00
45 40 35 30 25 20 15 10 5 0

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Time Value of Options
Time Value Behavior -

0.70

0.60

0.50

0.40

0.30

0.20

0.10

0.00
7 6 5 4 3 2 1 0

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Time Value of Options
Time Value Behavior -

Day ATM Option

49 1.50
28 Days
21 1.00
16 Days
5 0.50
5 Days
0 0.00

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Time Value of Options

Summary –
• At the money and near at the money
options have significant loss of time value
in last few days
• Securities with weeklys options should
always have an option expiring in the next
few days

CHICAGO BOARD OPTIONS EXCHANGE

Covered Call

Quick Review –
• Long stock
• Short call option on stock
• Short call is obligation to sell owned stock
Example –
Long 100 XYZ @ 53.50
Short 1 XYZ Jul 50 Call @ 4.25

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Covered Call

• Today is Thursday July 15 – market open

• August expiration is Friday August 22
(27 trading days)
• Long 100 XYZ @ 34.80
• Believe XYZ has significant resistance at
35.00
• Considering a covered call using the XYZ
Aug 35 Call which is trading at 1.28

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Covered Call

Trade –
Short 1 XYZ Aug 35 Call @ 1.28

Covered Call Position –

Long 100 XYZ @ 34.80

Short 1 XYZ Aug 35 Call @ 1.28

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Covered Call

Long 100 XYZ @ 34.80

Short 1 XYZ Aug 35 Call @ 1.28

Days to Aug XYZ XYZ Aug

Week Date Expiration Price 35 Call Change
0 7/15 27 34.80 1.28 0.00
1 7/16 25 34.80 1.23 (0.05)
2 7/23 20 34.80 1.10 (0.13)
3 7/30 15 34.80 0.94 (0.16)
4 8/6 10 34.80 0.74 (0.20)
5 8/13 5 34.80 0.50 (0.24)
6 8/20 0 34.80 0.00 (0.50)

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Covered Call

Weeklys Alternative –

XYZ
Days to Next Weeklys
Date Week Expiration XYZ Price 35 Call
7/15 7 34.80 0.60
7/23 5 34.80 0.50
7/30 5 34.80 0.50
8/6 5 34.80 0.50
8/13 5 34.80 0.50

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Covered Call

Sell 1 XYZ Aug 35 Call @ 1.28 or

Sell 1 XYZ Jul 15th 35 Call @ 0.60

Sell 1 XYZ Jul 23rd 35 Call @ 0.50
Sell 1 XYZ Jul 30th 35 Call @ 0.50
Sell 1 XYZ Aug 8th 35 Call @ 0.50
Sell 1 XYZ Aug 13th 35 Call @ 0.50
Total = 2.60

1.28 vs. 2.60

CHICAGO BOARD OPTIONS EXCHANGE
Covered Call

Single Transaction Advantage –

• Lower commission costs
• Less active strategy with only one
transaction
• Know income for whole time period when
initiating strategy

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Covered Call

Weeklys Rolling Transaction Advantages –

• Can discontinue strategy by not rolling to a
new week
• May change strike prices based on stock
movement
• Potentially more profitable
• Can avoid periods where early exercise is
possible

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Time Spread

• A time spread involves two options of the

same type and strike
• The difference is the expiration dates of
the two options
• This is a method of benefitting from how
time value is lost by options
• Would buy an option with more time to
expiration and sell a shorter term option

CHICAGO BOARD OPTIONS EXCHANGE

Time Spread

• XYZ @ 53.50 – expect the stock to stay in

a narrow range for a week
• June expiration is 66 trading days out and
XYZ June 54 Call is trading at 3.25
• Weeklys 54 Call has 6 days to expiration
and is trading at 0.90
Buy 1 Jun 54 Call @ 3.25
Sell 1 Weeklys 54 Call @ 0.90
Cost / Debit = 2.35
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Time Spread

Payoff Table at Weeklys Expiration –

Long L/T Short S/T

XYZ 54 Call 54 Call Debit P/L
48 0.55 0.00 (2.35) (1.80)
50 1.45 0.00 (2.35) (0.90)
52 2.25 0.00 (2.35) (0.10)
54 3.20 0.00 (2.35) 0.85
56 4.35 (2.00) (2.35) 0.00
58 5.75 (4.00) (2.35) (0.60)
60 7.25 (6.00) (2.35) (1.10)
CHICAGO BOARD OPTIONS EXCHANGE
Time Spread

Profit Loss Diagram Table at Weeklys Expiration –

1.50

0.00
50.00 52.00 54.00 56.00 58.00

-1.50

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Time Spread

Summary
• Neutral strategy used when a stock is
expected to experience little price move
• Position benefits from time loss of near
term option
• Weeklys options create the opportunity to
use this strategy as short term trade

CHICAGO BOARD OPTIONS EXCHANGE

Diagonal Spread

• A Diagonal Spread is similar to the Time

Spread
• Uses options with different strike prices
• In the money options lose little time value
relative to at the money options
• May be used in a similar fashion to a
Covered Call

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Diagonal Spread

• XYZ @ 53.80
• Expect the stock to stay in range
• Concern is XYZ may trade higher
• June expiration is 66 trading days out and
XYZ June 48 Call is trading at 6.90
• XYZ Weeklys 54 Call has 6 days to
expiration and is trading at 0.90
Buy 1 Jun 48 Call @ 6.90
Sell 1 Weeklys 54 Call @ 0.90
Cost / Debit = 6.00
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Diagonal Spread

Payoff Table at Weeklys Expiration –

Long L/T Short S/T

XYZ 48 Call 54 Call Debit P/L
48 2.85 0.00 (6.00) (3.15)
50 4.00 0.00 (6.00) (2.00)
52 5.40 0.00 (6.00) (0.60)
54 6.95 0.00 (6.00) 0.95
56 8.65 (2.00) (6.00) 0.65
58 10.45 (4.00) (6.00) 0.45
60 12.45 (6.00) (6.00) 0.45
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Diagonal Spreads

Profit Loss diagram at Weeklys Expiration –

1.25

0.00
50.00 52.00 54.00 56.00 58.00

-1.25

-2.50

-3.75

CHICAGO BOARD OPTIONS EXCHANGE

Directional Funding

• May use shorter term options to offset the

cost of longer term options
• LEAPS® are useful for a longer term
opinion on stock
• Selling shorter term options
opportunistically may offset the cost of a
LEAPS option

CHICAGO BOARD OPTIONS EXCHANGE

Directional Funding

• XYZ @ 42.50
• Have a negative opinion on XYZ over next
18 months
• Take a long position in a LEAPS Put
option
• Believe move will be a long grind lower
• Think support level for near term is 40.00
• Plan to sell short term put options to offset
the cost of the LEAPS Put

CHICAGO BOARD OPTIONS EXCHANGE

Directional Funding

XYZ @ 42.50
LEAPS Expiration 550 Days

Buy 1 XYZ 50.00 LEAPS Put @ 9.10

LEAPS Intrinsic Value = 7.50

LEAPS Time Value = 1.60

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Directional Funding

XYZ @ 40.25 (Down 2.25)

LEAPS Expiration 545 Days
Believe 40.00 is Support

Long 1 XYZ 50 LEAPS Put 10.65 (+1.55)

Sell 1 Weeklys 40 Put @ 0.45

CHICAGO BOARD OPTIONS EXCHANGE

Directional Funding

XYZ @ 41.25
LEAPS Expiration 540 Days
Weeklys Expiration Day

Long 1 XYZ 50 LEAPS Put @ 9.85 (+0.75)

Short 1 XYZ 40 Weeklys Put @ 0.00 (+0.45)

Weeklys Expires
Cost of LEAPS Put Offset 0.45
CHICAGO BOARD OPTIONS EXCHANGE
Directional Funding

Two ways to think of this –

Weeklys running profit = 0.45

LEAPS unrealized profit = 0.75

or

New LEAPS cost basis = 9.10 – 0.45 = 8.65

CHICAGO BOARD OPTIONS EXCHANGE

Directional Funding

XYZ @ 40.25 (Down 2.25)

LEAPS Expiration 520 Days
Still Believe 40.00 will hold as support

Long 1 XYZ 50 LEAPS Put 10.20 (+1.10)

Sell 1 XYZ Weeklys 40 Put @ 0.45

CHICAGO BOARD OPTIONS EXCHANGE

Directional Funding

XYZ @ 42.00
LEAPS Expiration 515 Days

Long 1 XYZ 50 LEAPS Put @ 9.35 (+0.65)

Short 1 XYZ 40 Weeklys Put @ 0.00 (+0.45)

Weeklys Expires
Cost of LEAPS Put Offset 0.45

CHICAGO BOARD OPTIONS EXCHANGE

 Directional Funding

Running Totals –

Long 1 XYZ 50 LEAPS Put +0.20

Short Weeklys Option Trades + 0.90

or

New LEAPS cost basis = 9.10 – 0.90 = 8.20

CHICAGO BOARD OPTIONS EXCHANGE

Directional Funding

Summary –
• Very dynamic and active method of using
Weeklys
• Cost of longer term option may be offset
through selling shorter term options
• Risk exists of being correct and missing
big move

CHICAGO BOARD OPTIONS EXCHANGE

Summary

• Weeklys on indexes have been around for

some time
• Now ETF and Equity Weeklys are
available
• With shorter time frames, new trading
opportunities exist
• CBOE is adding new Weeklys options
series every two to three weeks

CHICAGO BOARD OPTIONS EXCHANGE

Weeklys Options

Summary –

The CBOE Website has more information on

these and other products.

www.cboe.com/weekly

Questions / Comments?
rhoads@cboe.com

CHICAGO BOARD OPTIONS EXCHANGE