Anyone that trades options knows that the pace quickens the last few days before expiration. The delta (the change in option price relative to the underlying) for the ATM option is still around .5, but instead of gradual changes for the deltas on the strikes in / out of the money, the curve starts resembling a step function, going from zero for out-of-the-money, to one for in-the-money at expiration. The time decay of the option premium (theta) also accelerates, with perhaps 50% of the decay in the last month happening in the last week of the option’s life.
Taken from http://www.option911.com/blog/option-education/how-option-time-premium-decays-over-the-weekend/, click to enlarge
All of this is of course modulated by any changes in the volatility of the underlying, and the market in general.
Some traders avoid options close to expiration because of these factors–and others flock to them. As a covered call writer I am really attracted to the accelerated time decay of short term options. I’m not taking any more risk than normal holding the underlying, and I am getting an accelerated decay in the price of the options I am short on. I will often wait until there is only two or three weeks are remaining on the options to create the position.
Now it can be expiration week, every week for the following Stocks / ETFs (taken from this CBOE posting):
Weeklys on Exchange Traded Funds and equities. As of July 5, 2010, these included the following::
- SPY – Standard & Poor’s Depositary Receipts
- QQQQ – Nasdaq-100 Index Tracking Stock
- IWM – iShares Russell 2000 Index Fund
- GLD – Options on SPDR® Gold Shares
- XLF – Financial Select Sector SPDR
- EEM – iShares MSCI Emerging Markets Index
- C – Citigroup Inc
- BAC – Bank of America Corp
- AAPL – Apple Inc
- BP – BP PLC
- F – Ford
- GOOG – Google Inc.
Fidelity supports trading on these new weekly options, but Schwab does not appear to. Beware of the listed greeks on these options, the software may not be using the correct time until expiration.
The volume, at least on the SPY weeklies has been substantial (20K today on the 105’s expiring 9-July), so I think the options providers have a winner.
For more information see this options clearing house post.
