NYSE Euronext U.S. Options Exchanges announced on November 12, 2012 that they are expanding the listing and trading of their Short Term Option Series program from a single week to five consecutive weeks. The initial list of the underlying vehicles approved for the new program included the following stocks and ETFs:
- Apple (NASDAQ:AAPL)
- Bank of America (NYSE:BAC)
- BP PLC (NYSE:BP)
- Citigroup Inc. (NYSE:C)
- iShares MSCI Emerging Markets Index Fund (NYSEARCA:EEM)
- SPDR Gold Trust (NYSEARCA:GLD)
- iShares Russell 2000 Index (NYSEARCA:IWM)
- PowerShares QQQ Trust (NASDAQ:QQQ)
- SPDR S&P 500 Trust (NYSEARCA:SPY)
- Financial Sector SPDR (NYSEARCA:XLF)
This is excellent news for all options traders. Till now, you could trade options expiring in one week, one month or longer. This presented a real dilemma to traders. For example, if you wanted to buy weekly options, you could be burned by high negative theta (time decay). At the same time, if you wanted to be a seller of those weekly options, you would enjoy a rapid time decay, but at the same time be burned by any stock movement (negative gamma).
Now you could structure trades using any combination of options expiring in the next five weeks.
Let's see what we could do with those options.
- One possible trade that comes to mind is a calendar spread using two consecutive weeks. You can be short the next week options and long the options expiring one week after. This combination makes the trade cheaper compared to being long monthly options, and significantly increases the potential ROI (in case the stock stays in the trading range).
- Those who want to trade short-term Iron Condors (not my cup of tea) can now do it using options expiring in two weeks. This represents a good compromise between monthly and weekly options in terms of theta/gamma ratio.
- If you are trading a "campaign calendar" (buying long options expiring in 3-4 months, selling options expiring in one month and rolling them to the next month), you can now roll every two weeks instead of once a month.
- Another advantage is the opportunity to trade a specific event like earnings. For example, Apple's earnings are typically announced a week after expiration of the "normal" monthly options. You could always trade the weekly options expiring just after the earnings announcement. However, since those options are issued on Thursday, you had only a few days window to trade them. Now when those options are issued five weeks in advance, you can structure a longer-term trade to take advantage of the rising IV (Implied Volatility) of those options.
As a non-directional trader, I'm very excited about this development. I will be taking a full advantage of it in my earnings trades and my theta positive trades.
The list of the stocks participating in the program is expanding every week. To see the current list, you can visit the CBOE website.