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October 18, 2012

Weekly Options Impact and AAPL

Options have traditionally traded in 12 cycles per year. Since there are 52 weeks per year, most monthly cycles have had a life span of 4 weeks with the occasional 5 week cycle in order to make the math work out. In these multi-week cycles, each week tends to have its own personality and the tempo of price change would often accelerate as expiration approached. This effect was at least in part the result of the non linear nature of the decay curve of extrinsic premium. It is as if the option cycle began with a decay curve akin to an easy green ski trail and ends on a double black diamond slope.

If you are just learning to trade options, strategies that include a component of being short premium, the maximum potential total profit or loss is only achieved at expiration. This effect is easily seen in the case of vertical spreads which only reach their maximum potential gain or loss at expiration or when the spread goes deep in-the-money or out-of-the-money.

CBOE introduced weekly options in 2005 on several broad indices and the launch was met with a tepid reception. However, trading volume in weekly options contracts has recently exploded, additional

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indices and ETF underlyings have been added, and a number of actively traded equities have joined the family of weekly options. An updated list of the rapidly increasing available weeklies can be found at this CBOE site: http://www.cboe.com/micro/weeklys/introduction.aspx

Weekly options are a rapidly evolving and changing part of the options world. The new week’s options are offered on the Thursday of the week prior to expiration rather than the Friday.

The availability of weekly options has undoubtedly had a significant impact on a variety of strategies. Their acceptance and increase in trading volume has been nothing short of stunning. For example, the 635 and 640 call strikes in AAPL that were offered this morning and will expire next Friday, October 26, each

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have a volume of around 3,000 contracts today alone.

Are weekly options something that you can incorporate into your trading plan? You will have to decide for yourself.

John Kmiecik

Senior Options Instructor

Market Taker Mentoring

December 22, 2011

Weekly Options Impact

Options have traditionally traded in 12 cycles per year.  Since there are 52 weeks per year, most monthly cycles have had a life span of 4 weeks with the occasional 5 week cycle in order to make the math work out. In these multi-week cycles, each week tends to have its own personality and the tempo of price change would often accelerate as expiration approached.  This effect was at least in part the result of the non linear nature of the decay curve of extrinsic premium.  It is as if the option cycle began with a decay curve akin to an easy green ski trail and ends on a double black diamond slope.

For strategies that include a component of being short premium, the maximum potential total profit or loss is only achieved at expiration.  This effect is easily seen in the case of vertical spreads which only reach their maximum potential gain or loss at expiration or when the spread goes deep in-the-money or out-of-the-money.

CBOE introduced weekly options in 2005 on several broad indices and the launch was met with a tepid reception.  However, trading volume in weekly options contracts has recently exploded, additional indices and ETF underlyings have been added, and a number of actively traded equities have joined the family of weekly options.  An updated list of the rapidly increasing available weeklies can be found at this CBOE site: http://www.cboe.com/micro/weeklys/introduction.aspx

Weekly options are a rapidly evolving and changing part of the options world.  As an example of this rapid evolution, the new week’s options have begun to be offered on the Thursday of the week prior to expiration rather than the Friday as had been the case previously effective July 1, 2010.

The availability of weekly options has undoubtedly had a significant impact on a variety of strategies.  Their acceptance and increase in trading volume has been nothing short of stunning.  For example, the 390 and 395 call strikes in AAPL that will expire tomorrow, December 23, each have an open interest of around 10,000 contracts.

Are weekly options something that you can incorporate into your trading plan? You will have to decide for yourself.

Edited by John Kmiecik

Senior Options Instructor

Market Taker Mentoring

November 2, 2010

Reading Tea Leaves

It is often a daunting task deciphering the tremendous amount of information contained within an option chain for the trader beginning his study of the world of options. One of the most nuanced variables embedded within the prices quoted for the chains is that of the relative values of implied volatility (IV) amongst the various strike prices and the various months of expiration.

The IV of each of the various available options for a given underlying is not

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usually constant for each individual strike price and expiration cycle. The IV can and often does vary between individual strike prices within the same cycle; this variation is termed vertical skew. In addition, IV often varies at the same exact strike price when considered between various expiration cycles; this variation is termed a horizontal skew.

To review briefly, remember that option prices depend largely on the three primal forces of time to expiration, price of the underlying, and IV. The only one of these factors not immediately accessible to anyone with a quote screen and a calendar is IV. It is by changes in the magnitude of IV that future events of potential major import to the price of the underlying are expressed.

As an example of the information that can be gained by considering apparent anomalous values for IV, consider the case of ITMN. This biotech stock is represented in upcoming expiration cycles of: November, December, January, and April. Considering the example of the 14 strike call, the IV for these various months are: 54, 65, 78, and 136 respectively.

I have no idea what is up in the first quarter of 2011 for this stock, but the options markets are pricing a substantial probability of a significant price move between January and April expirations. These types of IV spikes are typically

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seen in biotech stocks ahead of significant FDA decisions.

Bill Burton, Market Taker Mentoring LLC