Exploding Options

Sean McLaughlin
October 6, 2022

According to the Wall Street Journal, options volume continues to explode – driven primarily by the growing popularity of short-dated options.

Whether looking to speculate, hedge or collect premiums, options players are increasingly flocking to options that have fewer than 7 days to expiration. And with the proliferation of weekly options and three-times weekly expirations in popular index ETFs like $SPY, $QQQ, and $IWM, traders frequently have the opportunity to trade options expiring within 24 hours!

It is no surprise that these types of short-dated options are attractive to some players. They offer the best characteristics of options: defined risk, leverage, and affordability for even the smallest of traders.

Of course, there is no free lunch. As nice as all the pros are, the cons are equally supersized when the ass-end of gamma smacks your trade in the face. As quickly as profits can accumulate when you nail the timing of one of these trades, any hint of delay for a long options position or fear of swift reversal in a short options position can rapidly erode whatever gains you may have in your position.

I am not immune to the seductiveness of short-dated weekly options. I employ them aggressively in a daily S&P 500 index options strategy that I trade. I aggressively position myself short in nearer-term options (1-7 days to expiration) against longer-dated long options in a calendar spread-type trade structure.

But I don’t typically engage with weekly options when making directional stock options bets. The type of research that All Star Charts specializes in is focused on multi-month timeframes. As such, the positions I typically put on are ones that I expect will take weeks or months to play out. This is our sweet spot. The big picture is what drives most of our trade selection.

For those who are day traders or very active swing traders, there is nothing wrong with trading weekly options. In fact, in some cases, it may be preferable to day trading the underlying common stocks. But we have to be sure we are balancing the pros against the cons, and the higher risks against the more aggressive returns.

If the math checks out for you, go on with your crazy self!

~ @chicagosean

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