Trading weekly options

CONTENTS

Cover

Half Title

Series Page

Title Page

Copyright Page

Dedication

Preface

Acknowledgments

Chapter 1: Introducing Weekly Options

Evolution of Weekly Options

Popularity of Weekly Options

Option Expiration Dates Explained

Option Symbols and Weeklys

Chapter 2: Short-Term Index Options

Dow Jones Industrial Average (DJX)

Russell 2000 (RUT)

NASDAQ-100 (NDX)

S&P 100 Weeklys (OEX and XEO)

S&P 500 (SPX, SPXPM, SPXW)

Index Option Comparisons

Comparing Index and Exchange-Traded Fund

Options

Chapter 3: Weekly Options on Equities and Exchange￾Traded Products

Stocks

Exchange-Traded Products

Leveraged Exchange-Traded Products

Inverse Exchange-Traded Products

Volatility-Related Exchange-Traded Products

Summary

Chapter 4: Option-Pricing Factors and Short-Dated

Option Contracts

Underlying Market Price

Days to Expiration

Implied Volatility

Interest Rates

Dividends

Chapter 5: Time Decay and Short-Dated Options

Behavior of Time Decay

Weekends and Time Decay

Time Decay and Trading Decisions

Avoiding Time Decay

Chapter 6: Implied Volatility and Weekly Options

Time to Expiration and Implied Volatility

Interpreting Implied Volatility

Behavior of Implied Volatility

Implied Volatility across Expiration Dates and

Strike Prices

Chapter 7: Developing Your Trading Plan

Markets to Trade

Trading Strategies

Trading Decisions

Capital and Risk Management

Keeping a Trading Record

Tying It All Together

Chapter 8: Long Option Trades

Long Call

Long Put

Chapter 9: Short Option Trades

Short Call

Short Put

Selling a Put to Purchase Shares

CBOE PutWrite Index

Tying Short-Dated Option Selling Together

Chapter 10: Covered Calls and BuyWrites

Covered Call Basics

Covered Call Trading Examples

Covered Calls and Dividends

Index Options and Covered Calls

CBOE S&P 500 BuyWrite Index

CBOE S&P 500 2 Percent OTM BuyWrite Index

Chapter 11: Hedging with Short-Dated Options

Protective Put

Protective Put Trading Example

The Collar

Trading Example Using the Collar

The Modified Collar

The Modified Collar Trading Example

Chapter 12: Bullish Spread Trading

Bullish Vertical Spread

Bullish Spread Trading Examples

Chapter 13: Bearish Spread Trading

Bearish Vertical Spread

Bearish Spread Trading Examples

Chapter 14: Neutral Spread Trading

Iron Butterfly

Iron Butterfly Trading Examples

Iron Condor

Iron Condor Trading Examples

Chapter 15: Split Strike Long Spreads

Synthetic Long and Short

Split-Strike Positions

Split-Strike Trading Example

Bull-Put Spread Plus Long Call

Chapter 16: Calendar Spreads

Calendar Spread Overview

Time Value and Implied Volatility

Option Skew

Trading Example

Chapter 17: Diagonal Spreads

Diagonal Spread Overview

Short-Term Diagonal Spreads

Short-Term Bullish Diagonal Spread

Short-Term Bearish Diagonal Spread

Long-Term Diagonal Spreads

Long-Term Bullish Diagonal Spread Trade

Bearish Diagonal Spread Trade

Chapter 18: Trading Earnings Releases with Short-Dated

Options

Stock Prices and Earnings

Option Prices and Earnings

The Earnings Announcement

Earnings Trades

Earnings Trading Strategies

Chapter 19: Leveraged Exchange-Traded Products

Leveraged Long

Leveraged Short

Chapter 20: VIX-Related Exchange-Traded Products

iPath S&P 500 VIX Short Term Futures ETN

(VXX)

ProShares Ultra VIX Short-Term Futures ETF

(UVXY)

About the Video

About the Author

Index

Access Code

TRADING WEEKLY OPTIONS

Founded in 1807, John Wiley & Sons is the oldest independent publishing

company in the United States. With offices in North America, Europe, Australia

and Asia, Wiley is globally committed to developing and marketing print and

electronic products and services for our customers' professional and personal

knowledge and understanding.

The Wiley Trading series features books by traders who have survived the

market's ever changing temperament and have prospered—some by reinventing

systems, others by getting back to basics. Whether a novice trader, professional,

or somewhere in-between, these books will provide the advice and strategies

needed to prosper today and well into the future.

For more on this series, visit our website at www.WileyTrading.com.

TRADING WEEKLY

OPTIONS

Pricing Characteristics and

Short-Term Trading Strategies

Russell Rhoads, CFA

Cover image: © iStockphoto.com/causeandeffectAU

Cover design: Wiley Copyright © 2014 by Russell Rhoads. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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ISBN 9781118616123 (Hardcover)

ISBN 9781118727171 (ePDF)

ISBN 9781118727386 (ePub)

To Maggie—

You always inspire me to do better than

anyone would have ever expected.

PREFACE

Short-dated options have taken off in popularity since being introduced on

stocks and exchange-traded funds in the summer of 2010. By some accounts, up

to 20 percent of daily trading volume may be attributed to these options. Short￾term stock traders who shied away from options have come to embrace the

shorter-dated contracts. Also, historically, there have been certain trading

strategies that would only be implemented the week of expiration. Now every

week is expiration week for options on almost 200 markets!

The first half of this book introduces or reviews option-pricing factors and

characteristics of option trading when contacts have just a few days remaining

until expiration. Time decay and time value are very different near expiration

than when options have weeks or months remaining until expiration. The second

half of this book discusses strategies and how they may be implemented using

options with just a few days remaining until expiration. Also discussed are

strategies that combine longer-dated options with contracts that have a few days

remaining until expiration. Short-term stocks and option traders should be trying

to take advantage of the time-decay characteristics of short-dated options and

this book highlights methods to do so.

Finally, visiting the website that accompanies this book is strongly

encouraged. The website highlights some advanced strategies that combine

contracts on unique exchange trade funds along with a consistent update on

short-term events, such as earnings announcements, that may offer short-term,

catalyst-trading opportunities. See the About the Website section for more

information about the website.

ACKNOWLEDGMENTS

The opportunity to write this book would not have come to me without a

tremendous amount of help from Kevin Commins. I will be forever indebted to

him for giving me the opportunity to work with Wiley. Meg Freeborn has been a

patient guide for the third time and I appreciate her patience with this project.

I am very fortunate to work with a wonderful group of people at the Options

Institute. In alphabetical order: Taja Beane, Jim Bittman, Laura Johnson, Barbara

Kalicki, Michelle Kaufmann, Mary Kearney, Peter Lusk, Pam Quintero, and Deb

Peters are a wonderful group to work with. Also the past two summers I have

had wonderful interns. Both Sean Knudson and Allison Michel were helpful

with this book. The combination of all these people has enabled me to set a

longevity employment record at the CBOE.

Finally, at home I promise Merribeth, Maggie, and Emmy that this is the last

summer with no vacation because I’m busy writing a book.