#3 – Weeklys Can Offer a Better Way to Play the News
When a company is about to announce earnings or when the FDA is set to rule on a trial for a biotech company’s new drug, traders anticipate the likelihood of a substantial move in the stock price. Traditionally, options become very pricey prior to news because there are far more buyers than sellers. That’s true for the Weeklys also, but because these options do not rise in price as much as their longer-term counterparts (again, we are talking dollars, not implied volatility), these options are still priced at a level where the risk takers are willing to play.
And it gets even better. Once the news is released, the resulting implied volatility drop has little effect on Weeklys. With Weeklys, it’s a simple game. You win or you lose. The stock makes the move you hoped to see or it doesn’t. Your options move into the money, or become worthless (remember expiration is just a short time away). Longer-term options decrease in value due to that implied volatility drop. Thus, the stock move must be large enough to support overpaying upfront or there are no profits.