What are Weekly Options?

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What are Weekly Options?

The New ICE Weekly Options:

Overview and Strategies

February 2012

1


Moderator for Today’s Program

Ray McKenzie

Vice President, Business Development

ICE Futures U.S.

2


Forward-Looking Statements and Disclaimer

This presentation may contain “forward-looking statements” made pursuant to the safe harbor provisions of the Private

Securities Litigation Reform Act of 1995. Statements regarding our businesses or expectations of trading with respect to the

Russell products that are not historical facts are forward-looking statements that involve risks, uncertainties and assumptions

that are difficult to predict. These statements are not guarantees of future performance and actual outcomes and results may

differ materially from what is expressed or implied in any forward-looking statement. For a discussion of certain risks and

uncertainties that could cause actual results to differ from those contained in the forward-looking statements see

IntercontinentalExchange, Inc.’s filings with the Securities and Exchange Commission (the "SEC"), including, but not limited to,

the "Risk Factors" in its Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC on February

9, 2011 and its Form 10-Q for the quarter ended June 30, 2011, as filed with the SEC on August 3, 2011. SEC filings are also

available in the Investors & Media section of IntercontinentalExchange, Inc.’s website. All forward-looking statements in this

presentation are based on information known to us on the date hereof, and

we undertake no obligation to publicly update any forward-looking statements.

You acknowledge that this presentation and the information provided during the conference call does not provide individualized

investment advice and does not advise or recommend any particular investment strategies for the individual circumstances of

any person. We recommend that you perform your own due diligence to determine the suitability of any strategy or

recommendation contemplated in this presentation or on this conference call. The determination of suitability and the decision

to engage in various trading activities are your sole responsibility. You understand that information provided by us is for

information purposes only and is not intended to be and does not constitute financial advice of an individualized nature for your

unique circumstances.

Disclaimer

The views and opinions offered in this presentation are solely those of the presenter: ICE has not verified the information

presented, and makes no representation about its accuracy or completeness. The views in the presentation are not

necessarily those of IntercontinentalExchange or ICE Futures U.S. and cannot be the basis for any claim against them.

Futures and options trading involves substantial risk and is not for everyone.

3


Weekly Options on Three ICE Commodities

Launch Feb 6 on ICE Futures U.S.

• Sugar No.11 Weekly Options

• Cotton No. 2 Weekly Options

• Coffee Weekly Options

Trading will be available electronically and on the trading floor

Weekly options on other IFUS products will be listed in the future

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What are Weekly Options

• Short-life, American-style options

• Terms generally match the terms of the regular monthly options on IFUS

futures (for example, strike prices, tick size, trading hours, exercise into

the underlying futures contract)

• Expire on a different date than the regular monthly option

• For each futures, three weekly options are listed for trading at one time

5


Some Facts To Know about ICE Weekly Options

• Each weekly option contract trades for approximately four weeks

• A new weekly option contract is listed for trading on the next business day

following the last trading day of another weekly option

• When a Friday is already the last trading day for a regular monthly option

contract, the weekly option contract that would expire on that Friday is not

listed

• On the last trading day, trading in each weekly option ends at the same time

as an expiring monthly option on that futures contract

Weekly options are treated the same way as other options with respect to

trading rules and market regulations

6


Links to Useful Documents

• For links to

• Contract specifications for each weekly option products specifications

• a listing calendar with first and last trading days through July 2012

• a weekly options FAQ

http://goo.gl/jnf2a

7


Today’s Program

• Trading Weekly Options

• The most important characteristics of short-dated options

• Situations in which traders use weekly options

• Some strategies for trading weekly options

8


Presenter

Mark Longo, Founder and CEO

The Options Insider, Inc.

www.TheOptionsInsider.com

• Founder and CEO, The Options Insider, an online options information company

• Hosts “The Long and Short of Futures Options” on OptionsInsider radio

• Creator of The Options Trader and The Options Observer columns in Trader

Magazine

Options market maker and independent options trader for 8+ years

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The Rise

Of Weekly

Options

The Short-

Term

Revolution

February 2, 2012

April 14, 2010

The Options Alliance 1


Mark S. Longo

• Founder & CEO,

www.TheOptionsInsider.com

• Host, The Options Insider Radio

Network

• Former Member, Chicago Board

Options Exchange (SPX, INTC, MSFT)

• Co-Founder: The Options Alliance

2

© 2012 The Options Insider Inc. All Rights Reserved.


TheOptionsInsider.com

3 © 2012 The Options Insider Inc. All Rights Reserved.


The Weekly Revolution

• This product category has

revolutionized the options market.

• Impacted liquidity and performance

across a wide range of option classes.

• Created an influx of new volume &

new customers.

4 © 2012 The Options Insider Inc. All Rights Reserved.


A Scalpel Not A Shotgun

• The Surgical Alternative: Weeklys were

designed to hedge specific event risk

(earnings announcements, crop reports,

etc).

• Long premium: Allow customers to

protect portfolios without buying a full

month’s worth of premium.

• Quickies: The name says it all.

5 © 2012 The Options Insider Inc. All Rights Reserved.


A Premium Seller’s Dream

• The plan was for a near-term

defensive tool.

• In practice, weekly options, particularly

weekly equity options, have attracted

large numbers of premium sellers.

• Customer paper in most weekly equity

option products leans overwhelmingly

toward short premium.

6 © 2012 The Options Insider Inc. All Rights Reserved.


Changing The Curve

• The influx of short premium has

fundamentally altered the liquidity

landscape of many products.

• Hitting the bid: Customers routinely sell weekly

products as soon as they are listed, causing

dramatic premium contraction after the opening

bell.

• Liquidity Dichotomy: The migration of

premium sellers into weeklys accelerated time

decay in those products. Leaving longer-term

contracts primarily to premium buyers

7 © 2012 The Options Insider Inc. All Rights Reserved.


Maximize Time Decay (Theta)

• To generate maximum income, you need

to maximize the amount of time

decay collected.

• Time decay increases exponentially

as you approach expiration.

• Option writers concentrate on shorterterm

options to maximize decay.

8 © 2012 The Options Insider Inc. All Rights Reserved.


Theta In Action

• IBM Oct 120 Call w/63 Days to Expiration

9 © 2012 The Options Insider Inc. All Rights Reserved.


Theta In Action: Part 2

10 © 2012 The Options Insider Inc. All Rights Reserved.


A Lasting Impact

Weeklys have changed the equity

option landscape.

• The vast majority of short premium

transactions have migrated to the shortduration

contracts.

11 © 2012 The Options Insider Inc. All Rights Reserved.


A Buying Opportunity

• Overselling: Ignorance of Theta has also

led to many customers overselling weekly

products, particularly before weekends.

• A Free Weekend: Disciplined traders can

often purchase weekly options that have

already had the weekends priced out of

the contracts.

12 © 2012 The Options Insider Inc. All Rights Reserved.


Futures Change the Game

• The weekly options rollout has unfolded

much differently in the futures options

market.

• Polar Opposites: Weekly futures options

products exhibit a vastly different use case,

utilize a different implementation and attract

different customers.

Weekly futures options adhere much

closer to the original plan for weeklys –

provide short-term protection.

13 © 2012 The Options Insider Inc. All Rights Reserved.


A Different Use Case

• Long Premium: Weekly futures options are

overwhelmingly used to establish long premium positions.

• These long premium positions are intended to hedge

against, or speculate on, specific events (crop reports,

etc).

• Late Bloomers: Most weekly futures options are actually

traded at the end of the product’s life cycle. A substantial

number of customers are opening long positions on

expiration day. This reinforces the desire to hedge specific

event risk.

• Example: 50% of weekly treasury options trade in the

final two days of the expiration cycle.

14 © 2012 The Options Insider Inc. All Rights Reserved.


Different Implementation

• Short-term equity options are

disseminated on a weekly basis –

prompting a flurry of new selling activity

each week.

• Short-term futures options are

disseminated on a monthly basisproviding

for more nuanced planning &

implementation.

15 © 2012 The Options Insider Inc. All Rights Reserved.


Different Customer

Weekly equity options have attracted

a substantial number of retail

customers. Primary interest: income

generation.

Weekly futures options primarily

attract institutional customers and

end-users. Primary interest: hedging

underlying exposure.

16 © 2012 The Options Insider Inc. All Rights Reserved.


New Customers Are Coming

Weeklys are broadening the reach of

futures options: Lower premium levels have

reduced the barrier to entry for many retail

options traders.

• Interest from our Options Insider

audience has never been higher.

• More options for liquidity: Market makers

are attracted to weeklys as new hedging

opportunities as well as ways capture edge.

17 © 2012 The Options Insider Inc. All Rights Reserved.


Benefits of Weeklys

• Low Premium: Cheap sources of

protection/speculation.

• Extremely High Gamma: Influenced by

small movements in the underlying.

• Precision: Hedge specific event risk.

• New Users: Lower price point attracts

new users and new sources of volume.

18 © 2012 The Options Insider Inc. All Rights Reserved.


Limitations of Weeklys

• Liquidity: Liquidity and spreads can

become erratic as you move away from

front week ATM.

• Extremely High Gamma: Influenced by

small movements in the underlying.

• Limited Adjustments: The short time

horizon provides few opportunities to

adjust or repair a trade.

19 © 2012 The Options Insider Inc. All Rights Reserved.


Popular Weekly

Strategies

20 © 2012 The Options Insider Inc. All Rights Reserved.


Hedging Specific Event Risk

• The #1 use case for weekly futures

options. Takes different forms depending on

product class.

• Defend against upside crash: Hedging

activity in weekly commodity options focuses

on long OTM calls. Sugar, coffee and cotton

should follow suit.

• Defend against downside crash: Hedging

in weekly futures options on equity indices

typically focuses on long OTM put positions.

21 © 2012 The Options Insider Inc. All Rights Reserved.


Upgrade Your Hedge: Part 1

• Renewed focus on premium reduction: Repeated hedging in

weeklys can become expensive over time.

• Upgrade to Verticals: Defensive players looking to reduce

premium outlay have shifted liquidity into call verticals vs. buying

OTM calls outright.

• Buy ATM/Sell OTM Calls: Reduces net premium outlay. Allows

trader to migrate hedge closer to the ATM strike, providing more

immediate return on their hedging dollar.

• Con: Reduces protection against extreme movements.

• Ideal for: Customers looking for modest protection at a reduced

cost.

• Popular in: Most product classes.

22 © 2012 The Options Insider Inc. All Rights Reserved.


Upgrade Your Hedge: Part 2

• Zero Cost Hedge: Premium-conscious

customers have also begun implementing

spreads with the goal of zero premium outlay.

• Buy ATM/Sell OTM Calls On A Ratio: Reduces

net premium outlay to zero.

• New Risk Profile: Protects against small

movements, but magnifies crash risk.

• Ideal for: Customers looking for minimal

protection at no cost. Not appropriate for

customers looking for maximum protection.

23 © 2012 The Options Insider Inc. All Rights Reserved.


Trading Term Structure

• Generate directional exposure at a reduced

cost.

• Example: Long front month ATM coffee call,

short week one ATM coffee call.

• Maximize Theta: Finance long delta position

with three subsequent short weekly positions.

• Some Flexibility: Short strike can be adjusted

each week to account for underlying movement.

24 © 2012 The Options Insider Inc. All Rights Reserved.


Long Ratio Diagonal Spread

• Generate directional exposure at a dramatically

reduced cost (credit).

• Example: Long front month ATM coffee call, short

three week one OTM coffee calls.

• Ratio Reduces Costs: Net premium outlay for long

delta position is nominal.

• Heavily Short Gamma: Subject to minute

underlying swings.

• Heightened Risk Profile: Dramatic near-term

movements will be costly.

25 © 2012 The Options Insider Inc. All Rights Reserved.


Reverse Collar/Risk Reversal

• Collars are typically constructed with a long

put financed by a covered call. Used to hedge

long equity positions.

• For sugar, cotton, coffee and other futures

options products, the risk is to the upside.

• Reverse Collar/Bullish Risk Reversal:

buy OTM Call, sell OTM put. Can be done with

or without underlying exposure.

26

© 2012 The Options Insider Inc. All Rights Reserved.


Multiple Implementations

Weekly Bullish RR: Long Week 1 OTM Call, Short

Week 1 OTM Put - Near-term long delta position

ahead of crop report.

• Reverse Collar: Long Week 1 OTM Call, Short Week

1 OTM Put, Short Futures - Hedge short delta

exposure ahead of crop report, etc.

• Bullish RR: Long Front Month OTM Call, Short Week

1 OTM Put: Maximize decay to finance a long delta

position.

• Ratios, Long Underlying, etc: Many ways to

customize this strategy to your needs.

27

© 2012 The Options Insider Inc. All Rights Reserved.


Trading Volatility

• Gamma & Theta, not Vega: Weeklies are not ideal for

volatility trading. But they can be an excellent way to

finance a volatility position.

• Example: Long 1 Dec 2012 ATM Coffee Call, Short 1 Week

One OTM Coffee Call, Short Dec 2012 Coffee Futures on

delta neutral basis.

• Ideal for: Trader with bullish long-term volatility outlook

who believes coffee will remain stable in the near-term.

Repeated implementation will allow trader to collect theta

while waiting for profits on his volatility position.

• Short Gamma: Not ideal for a commodity market that is

prone to violent swings in the near-term.

28 © 2012 The Options Insider Inc. All Rights Reserved.


Other Weekly Strategies

• Short Weekly OTM Put: Generate income

and/or establish long positions in underlying

commodities. Highly directional in nature.

• Long Weekly ATM Butterfly/Iron Condor:

Allows hedgers to offset long premium

exposure with non-directional strategy. Short

time horizon limits adjustments/gamma

scalping.

29 © 2012 The Options Insider Inc. All Rights Reserved.


Questions

30 © 2012 The Options Insider Inc. All Rights Reserved.

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