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CBOE Offers Traders Quickies

One potential problem or limitation is that no new strikes will be added during the week, no matter what transpires. That could be a problem if the index rises or falls more than 3% in a week (given the current 122 value), because that would push one side, either the puts or calls, out of the money, leaving little trading in that particular weekly's listing and forcing those with existing positions to look for alternatives.

That said, limiting the number of strikes listed seems to be a wise choice and an acknowledgement of the fact that it will be very difficult to create a liquid market with an active bid/ask for out-of the-money options that have only days remaining.

No one benefits -- not exchanges, brokers or investors -- from adding options that have no open interest or trading volume. So one of first obstacles to turning Quickies into a successful and value-added addition to the existing options available for trading is determining whether it is economical and feasible for market makers to maintain active quotes and offer a standard "10 up" market -- that is, 10 contracts per side -- for relatively worthless options.

"One of our first challenges is for us to figure out the logistics of presenting this additional information in a clean and understandable format on our trading screens and quotation pages," says David Kalt, president of the online brokerage firm OptionsXpress. Kalt says that to avoid confusion and prevent errors, it will be important to create a clear distinction between the two options with the same strike in the single month with different expiration dates.

Uses and Abuses

Despite the CBOE's decision to use a mini contract, the initial target audience for weekly options seems to be professional and institutional investors.

"Thus far we have seen very little, as in next to none, questions or inquiries from our retail customers regarding weekly options," says Kalt. He thinks this is by design, as the CBOE has taken a low-profile approach to the product launch. For example, the exchange has not provided the typical "Intro 101" or strategy seminars that usually accompany product launches.

One reason might be that they do not want to encourage the undisciplined speculation that is associated with trading extremely short-term options. These options will have a very high delta, meaning the rate of change in the options price will be very sensitive or highly correlated to changes in price of the underlying index. This means they can be an efficent hedging tool but also present a highly leveraged instrument for short-term trading.

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