Peak Investing

Trading the "Weeklys"

The Chicago Board Options Exchange (CBOE) has launched a new type of option, "Weeklys". Weeklys are short term options based on the S&P 500 Index (SPX) and S&P 100 Index (OEX). As their name implies they are weekly contracts. These contracts were developed to help investors trade around certain news or events. In general, Weeklys have the same contract specifications as standard options, except for the time to expiration. New series are listed each Friday, expiring the following Friday. (The exception being that no Weeklys will be listed that expire the third Friday of the month -- the expiration week for standard options). Both SPX and OEX Weeklys are cash-settled contracts and offer the same continuous, two-sided quotes as standard options. SPX Weeklys are European-style exercise with A.M. settlement, and OEX Weeklys are American-style exercise with P.M. settlement.

So how do we trade the Weeklys? One way is to use our Options Volatility Analysis (OVA). The OVA calculates the probability that the underlying index will close at a given strike price at options expiration. On Monday, Jan 9th, 2006, we uncovered a trade set-up for the S&P 500 Weeklys. With the SPX trading at 1290, the OVA said the probability that the SPX would close above the 1275 strike price on Friday morning, Jan 13th expiration was +/-90%. Using that information, we put on a bullish put spread Tuesday morning, selling the 1275 Put and buying the 1260 Put for a $1.20 credit. The SPX closed on Thursday at 1286, well above our breakeven strike of 1275, and both of our options expired worthless. The trade made a nice quick 8% return on margin. We were only in the trade for 3 days and, given the high probability of success, it was practically risk free.

One of the big advantages of the OVA method is that these trades can be put on at any time up until one day before expiration. With the addition of the Weeklys, there is a potential low-risk option trade every week. The PeakInvesting site includes our successful POI strategy, covered call writing and S&P 500 Forecasting. And now with Auto-Trading, its the best options site on the web. Sign-up now for your Free Trial and receive both our Weekly and monthly POI credit spread recommendations.

Except where otherwise specifically stated, all trades are based on hypothetical or simulated trading. Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under-or-over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. Commissions, fees, and slippage have not been included. This is neither a solicitation to buy/sell securities or listed options.

Disclaimer: Options trading has large potential risks. You must be aware of the risks and be willing to accept them in order to invest in the options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed. The past performance of any trading system or methodology is not necessarily indicative of future results.