In a culture of diminishing attention spans, where people choose instant gratification over long-term commitment, and where the concept that everyone should be famous for 15 minutes has become frighteningly achievable, it makes perfect sense to turn options expiration, which had been a once-a-month event, into a weekly occurrence.Filling this gaping need on Oct. 28, the Chicago Board Options Exchange will begin listing Weeklies, or Quickies in industry parlance, which are options that have just a one-week life span. Like other new products that take advantage of electronic technology and accelerate the rate at which trades and strategies can be implemented, weekly options are a logical and innovative addition to an existing trading tool. But they come with a their own set of limitations, obstacles and risks. The new options will be tied to the Mini-SPX Index, a newly created index that is based on the S&P 500 but will be based on one-tenth the value of the S&P 500 stock index. For example, if the S&P 500 Index is at 1220, the Mini-SPX would have a value of 122. The Mini-SPX Options (XSP) contract option specifications will be consistent with standard SPX index options: a multiplier of $100, cash settlement and European-style exercise (meaning options can be exercised only on expiration Friday), but as with SPX options, the last day of trading will be the Thursday prior to expiration. Weeklies will be listed on a week-to-week basis, starting on Friday and expiring the following Friday, for three weeks a month. There will be no weekly options listed that overlap the existing monthly expiration date that occurs on the third Friday of the month. Initial strike prices will be in dollar increments, and there will be only five strikes per expiration -- two in-the-money, one at-the-money and two out-of the-money strikes.
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.
"Options generally fall under three categories: income generation, portfolio protection and leveraged speculation," says Kalt. This is not to say that weekly options won't ultimately offer new ways to apply hedging time-related trading strategies such as calendar spreads or strangles. Until weekly options prove they have liquidity and expand their listings, their purpose will be mainly restricted to the third category of short-term speculation and therefore will not being promoted as "a must-be-used trading tool," concludes Kalt. The success and proliferation of weekly options will greatly depend on investor response to the first SPX Weekly option contract. If the initial response is not overwhelming, the exchange might wait before launching any more weeklies. Ironically, the fact that the CBOE has chosen the SPX could be an obstacle to its success. The SPX is one of the few options that remain singly listed, so the new contracts will trade only on the CBOE, which has about a 32% share of the entire options market. That limited market exposure could hinder the Quickies' success by making them a less-competitive market that multi-exchange-listed options. "If this was launched using the QQQQs or even the SPYs, we might see a very different approach and results," says OptionsXpress' Kalt, which would presumably include a bigger push among retail traders. But maybe the CBOE's decision to use its competitive advantage and be the first mover on this new type of product will benefit investors and other exchanges in the long run. The CBOE can incur the costs associated with the initial launch, iron out the kinks and logistics and gather the data to determine the best uses for the weekly options. Then, if interest warrants expanding weekly options to other products, such as additional indices, ETFs or even individual equities, the Quickies will likely be listed across multiple exchanges, which will create a more competitive, liquid and efficient market, and that will be good for everyone involved and can only help the longevity of weekly options.