Let’s continue our discussion of weekly options, i.e., weeklys. I recently received this question from a reader:
Weeklies seem like a great product. Consider at-the-money calls and puts at the beginning of the week on E-mini S&P future (ES) priced around 10 bucks each. If someone systematically writes each of these every week for whole year, he can grab (theoretically) a total of 52×20 = 1,040 SPX points. Now whatever happens to SPX in the interim, I doubt it will move 1,040 points in a year in any one direction. So my question is: Is it really that simple? What am I missing? Either weeklies are mispriced (up) heavily or my math is wrong.
Assuming that’s the actual prices with a week to go, the math is correct. But it’s not quite that simple. What if ES goes down $20 in a week? Theoretically, you then scratch on the first straddle and presumably close and then roll into the next straddle. So it’s not really additive.
It did get me thinking though. What about a buy-write strategy that uses weeklys?
The CBOE indexes a benchmark buy-write, the CBOE S&P 500 BuyWrite Index (BXM). Quite simply, it buys SPX and writes the nearest above-money call in the next monthly expiration cycle (the money is defined by the forward SPX price for the next monthly expiration).
So, here’s my question: Would a system that substitutes weeklys outperform BXM?
Well, it may be a little early in the game to judge. But it may not be.
The shorter the life of an option, the swifter the time decay. But the success of a shorter-dated option sale depends more on the volatility of the underlying instrument itself, and less on the path of the implied volatility of the option. Specifically, the less volatile the underlying, the better you do with the shorter-duration sale.
In plain English, if nothing much happens, selling weeklys and rolling 52 times will outperform selling monthly options and rolling 12 times a year.
Of course, we don’t know that nothing will happen. What if SPX tanks such that both the weekly and monthly calls have little value? Clearly you did better selling the monthly option as you got more dollar premium. Not to mention when you roll the weekly, you now need to sell a much lower strike call. Likewise, a big rally will put both the weekly and monthly to parity, so again, the bigger dollar premium you took in for the monthly works in your favor.
I like the concept of buy-writing (or put selling) in the weeklys, just know that the shorter the duration, the greater the gamma. And the greater the gamma, the greater potential risk.
Follow Adam Warner on Twitter @agwarner
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