What is weekly option?
A weekly option contract is a type of options contract that expires every Friday, offering investors more frequent opportunities to trade options compared to standard monthly options. These contracts share
the same basic structure as traditional options, granting the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price by the expiration date.
Here's a more detailed breakdown:
Expiration:
Unlike standard options that typically expire on the third Friday of the month, weekly options expire on
every Friday.
Purpose:
Weekly options are often used for short-term trading strategies, allowing investors to capitalize on price
movements within a shorter timeframe.
Flexibility:
They offer greater flexibility for traders to adjust their positions and manage risk on a weekly basis.
Contract Specifications:
Weekly options generally mirror the specifications of their monthly counterparts, including the
underlying asset, strike prices, and contract size.
Risk Management:
Euronext suggests limiting risk to one week's worth of premium when trading weekly options.
Example:
Imagine a call option on a stock trading at $100 with a strike price of $110 and an expiration date in one
month. The buyer of this option pays a premium (e.g., $5).
- If the stock price rises above $110 before the expiration date: The buyer can exercise the option, buying the stock at $110 and potentially selling it at the higher market price, making a profit.
- If the stock price stays below $110: The buyer can let the option expire worthless, limiting their loss to the premium paid.
- The seller of the call option (also known as the writer) receives the premium and is obligated to sell the stock at $110 if the buyer chooses to exercise the option .