The introduction of short-dated options, such as those with Monday and Wednesday expiries, presents both new opportunities and risks for traders and investors. For some symbols like SPY and QQQ, options contracts can now expire every day from Monday to Friday.
Impact on Hedging and Volatility
Hedging: The availability of more frequent expiries allows for more precise hedging against specific, short-term events like earnings announcements or economic data releases. Investors can use strategies like a Collar with Stock, which involves buying a put for downside protection and selling a call to finance the cost, to create a protective range around their stock position for a shorter duration. This can be more cost-effective than using longer-dated options.
Volatility and Risk: Short-dated options, also known as End of Day Options, inherently involve higher risks and volatility. Price movements in the underlying asset have a greater and more immediate impact on their value. On the expiration day, the time value of these options decays to zero, leaving only intrinsic value if they are in-the-money or becoming worthless if they are out-of-the-money. This rapid time decay (Theta) can lead to significant gains or losses in a very short period.
Potential Use Cases
The increased frequency of option expiries facilitates several strategies tailored to short-term market movements:
Event-Driven Hedging: Investors can hedge positions around specific events, such as earnings reports or macroeconomic announcements, with greater precision.
Intraday and Short-Term Speculation: Traders can use strategies like a Long Straddle (buying a call and a put with the same strike and expiry) to profit from significant expected price volatility in either direction, without needing to predict the direction of the move.
Income Generation: Strategies like selling Covered Calls (selling a call option against a stock you own) can be implemented more frequently to potentially generate a steadier stream of income from premiums.
It is crucial to understand that option trading entails significant risk, and investors can lose their entire investment rapidly. Factors such as market liquidity, bid-ask spreads, and transaction costs become even more critical when trading short-dated options.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
