Rhoads, Trading Weekly Options

Weekly options have become popular trading vehicles for both hedgers and speculators. By late 2012, the last year for which annual market statistics are currently available, weekly SPX options accounted for over 20% of average daily volume. But weekly options are not simply monthlies divided by four. Instead, the trader is always navigating expiration week, which can be as unforgiving as it can be profitable.

In Trading Weekly Options: Pricing Characteristics and Short-Term Trading Strategies (Wiley, 2014) Russell Rhoads, an instructor for the Options Institute at the CBOE, offers an overview of ways to trade these short-dated derivatives. The general principles and strategies should be familiar to any reader with a basic understanding of options, but Rhoads tweaks them to accommodate a weekly setting.

After some introductory chapters Rhoads offers a straightforward discussion of time decay and implied volatility. He then turns to what makes up the bulk of the book—strategies. He describes long option trades, short option trades, covered calls and buy-writes, hedging with short-dated options, bullish spread trading, bearish spread trading, neutral spread trading, split strike long spreads, calendar spreads, diagonal spreads, and trading earnings releases. He wraps up the book with brief chapters on leveraged ETFs and VIX-related ETFs and ETNs.

To get a sense of the level of Rhoads’s analyses, let’s look at a single strategy—the iron butterfly. Rhoads describes two trades in GLD, one with three days until expiration and the other with one day until expiration. The rationale for structuring a short-term trade as an iron butterfly is that “iron butterflies are very precise as far as the price target. Also, since they are often short at-the-money options the position will benefit from at-the-money time decay. Because of the precision needed to make close to the maximum profit iron butterflies are good candidates for very short-term trades—even for trades that last a single day.” (p. 152) The one-day trade can have a narrower or wider payout range (in his example, 123/124/125 versus 122/124/126). “The choice between the two iron butterfly spreads may come down to the certainty that GLD is going to stay in a narrow range the following day and finish the trading day near 124.00. The dollar risk-reward favors the 123/124/125 spread where 0.68 may be made or 0.32 lost, while the 122/124/126 iron butterfly would pay out 1.02 or lose 0.98, depending on the price change in GLD. The choice may also be based on historical price moves from GLD and the current implied volatility relative to expectations.” (pp. 156-57)

As should be evident from this example, Rhoads is writing for the relative novice (and presumably for the novice who hasn’t yet learned that nothing is certain in the financial markets). The reader who is looking for a more advanced, sophisticated discussion will have to turn elsewhere.

The book comes with access to an online video course in four modules: introduction to the course, introduction to weekly options, trading earnings announcements, and index option trading strategies.