A reader recently asked: “I was wondering what your thoughts were on whether or not these weeklys will eventually have the same potential widespread pin action on Fridays as monthlys already do, assuming, of course, they become more liquid and popular.”
He is referring to weekly options, which were first listed in fall 2009 on the S&P E-minis, and have now expanded to include most of the big ETFs like the SPDR S&P 500 (NYSE: SPY) and PowerShares QQQ Trust (NASDAQ: QQQQ), and several popular individual names as well, like Apple Inc. (NASDAQ: AAPL) and Amazon.com, Inc. (NASDAQ: AMZN). You can see the description, as well as current list if you click on the CBOE micro site here, and then click on AVAILABLE WEEKLYS to see it in spreadsheet form.
As of July 1, weekly options begin trading on Thursdays, and expire a week and a day later. Open interest does not generally approach that of “regular” options that expire on the third Friday of each month, but it’s growing.
AMZN, for example, shows open interest of 2,697 calls with a 130 strike expiring tomorrow, compared to 7,102 expiring on Aug. 20. BP plc (NYSE: BP) has open interest of 11,226 of the $40 strike expiring tomorrow versus 53,285 expiring on “normal” expiration day. Those ratios are high enough to have some influence, while other names like Bank of America Corporation (NYSE: BAC) and Citigroup Inc. (NYSE: C) have not seen weeklys catch on.
But it’s incredibly early in the game here. As liquidity grows and more customers get used to the idea, we may very well see the lines blur and the concept of waiting until the third Friday of the month may become a thing of the past.
Let’s say AMZN reports earnings the week after monthly expiration (which it generally does). It’s not beyond the realm of possibility than weeklys expiring the fourth Friday of that month ultimately get more play than the “regulars.” Or what if we have big Fed news or a big jobs number off cycle? I can certainly see some extra SPY play on the corresponding weeklys.
So, back to the reader’s question. If, in fact, this all comes to pass, we do have the risk of more pinning action (stock price being “pinned” to a heavily traded strike), or at least more frequent pinning action.
In a slow patch, it could literally happen every week. And, if that’s the case, it will get tough to break from strike in the middle of the week as well.
But what about in volatile times? Weekly option shorts will get caught on the wrong side of a move very quickly. They have precious little premium cushion to play with. If a name starts moving against them, they’ll have to start chasing it to defend their positions, actually adding volatility on the margins. This will have the effect of extending a trend move.
At the end of the day, any time market structure changes, it affects volatility. This one will prove no different.
Follow Jon Ogg on Twitter @jonogg.
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