My last several options blogs have been about the rapid and dramatic interest in and activity with the weekly options.
The full impact of this weekly options in the options market is not yet known. For the covered call writer, the rapid theta decay of weekly options presents a potential opportunity to collect additional premium over 52 weekly cycles as opposed to the historically available 12 monthly cycles.
Another theoretical result of the tremendous volume of weekly options traded, there is early evidence of a weekly “pinning” effect. Remember that option strike pinning is usually a relatively weak force that heretofore had characteristically been seen the week of options expiration. This phenomenon refers to the tendency for an underlying to close at or close to an option strike price when no other strong directional trends are in play.
Finally, as Adam Warner has pointed out, these options may well reinforce a directional trend that develops after the weekly option premium sellers have taken their positions. Because there is little premium with which to offset adverse directional moves, and also because these short dated options have abundant gamma, premium sellers could be forced to defend their position thus causing exacerbation of directional moves.
Remember that the ancient Chinese character for danger and opportunity is the same. We are dealing with the new arrival of powerful forces which have the potential to change the landscape of the options world.
Bill Burton, MTM Writer