Weekly options are a type of options contract that expires on Friday of each week, as opposed to the third Friday of the month for standard monthly options. This shorter expiration timeframe is their defining characteristic and significantly impacts how they are priced. Because these contracts have very little time until expiration, the 'time value' component of their price erodes much more rapidly than with monthly options. This phenomenon is known as accelerated time decay, or theta decay, and it means that weekly options lose value quickly as expiration approaches, assuming the underlying asset's price remains constant.
Furthermore, weekly options are highly sensitive to small price movements in the underlying asset, a concept known as gamma sensitivity. A small move in the underlying can lead to a proportionally larger change in the weekly option's price. This makes them attractive to traders looking to capitalize on short-term market fluctuations but also exposes them to higher risk. Volatility also plays a crucial role; higher implied volatility tends to increase the premium of weekly options more significantly than longer-dated options because future price swings have a more immediate potential impact over such a short period. Conversely, a decrease in implied volatility can cause their prices to drop sharply.
The supply and demand for weekly options also affect their pricing. High trading volume and open interest in particular weekly options can create tighter bid-ask spreads and more efficient pricing, while less liquid weekly options might have wider spreads and be harder to trade. Understanding these dynamics is essential for anyone considering trading weekly options, as their short lifespan and heightened sensitivities require a different approach to risk management and strategy compared to traditional options contracts.
The primary difference lies in their expiration cycles. Weekly options expire every Friday, offering a much shorter contract duration than monthly options, which typically expire on the third Friday of each month.
Time decay, or theta, affects weekly options prices much more rapidly due to their short lifespan. As expiration approaches, the time value component of the weekly option's premium diminishes at an accelerating rate.
Generally, weekly options are considered riskier due to their accelerated time decay and higher sensitivity to price changes and volatility. This can lead to quicker and potentially larger percentage gains or losses compared to monthly options.