Options have existed since 1972, but the Call and Put strategy was not available until five years later. Regulatory bodies imposed many new rules & regulations over time, derivatives contracts became standardised, new asset classes were launched, and new trade options were created. Weekly options are one of these opportunities, which we will review in depth.
What are Weekly Options?
As the name suggests, they are short-term derivatives with characteristics similar to standard options contracts. Weekly contracts have an eight-day expiration date and are mostly reintroduced every Thursday. With weekly options, you get 52 contracts per year to take any position and profit in the short term.
They are ideal for traders who want to profit from the time decay curve. Weekly options are settled in cash and traded in European style. You can only use the ‘call’ or ‘put’ right on expiry. If the expiry date falls on a public holiday, it will be settled the next day. The settlement cycle is T+1 from the expiry date.
What are the features of Weekly Options?
Weekly options have the same features as standard options, but some differences exist.
- Affordable premiums: The shorter the time to expiry, the less expensive the options contract. When you compare the premium of monthly options on any underlying asset that expires on the third Friday of the month to that of weekly options on similar assets, you will observe that the latter is more affordable. But if you are short on your position, the premium you will receive will also be lower.
- Faster time decay: Options are infamous for being unattractive to trade as they approach their expiration. The same is true for the weekly ones. However, they are more prone to time decay than standard ones.
- Highly volatile: The stock market is extremely volatile, and the impact would be felt more acutely if the holding period was shorter. Even if you own an options contract, the prices of the underlying assets in weekly contracts tend to fluctuate faster than those with a longer expiry date.
What are the different types of Weekly Options?
In India, weekly options are only available on indices, not commodities, stocks, or other asset classes. So let’s learn about them.
- Nifty 50 options: It is the weighted average of the top 50 companies on the exchange in terms of market capitalisation. The minimum lot size for trading Nifty50 weekly options is 50 and is settled every Thursday.
- FINNIFTY options: This index was recently introduced at the start of 2021. It consists of 20 stocks from the NBFC, insurance, and other financial services sectors. The minimum lot size is 40 shares and is settled every Thursday.
- BANKNIFTY options: This index tracks the performance of India’s top 12 largest banks in terms of market valuation. A single lot of its weekly contract consists of 25 shares. It expires every Tuesday of the month.
- MIDCPNIFTY options: It is essentially the Nifty Midcap Select index, which tracks the performance of the Nifty Midcap 150 top 25 focused stocks. This index’s weekly options are available in a lot size of 75 and are settled every Tuesday.
Pros and Cons of Trading Weekly Expiry Options
- Lower Ticket Size: With reduced premiums due to shorter expiry, entry costs for weekly options are lower, enhancing accessibility for traders.
- Income Generation: Selling weekly options can yield attractive premiums, especially as time decay affects these options more rapidly.
- Time Sensitivity: The condensed time frame amplifies the impact of market movements. If the underlying asset doesn’t move favourably, losses can occur quickly.
- Liquidity Considerations: Optimal liquidity isn’t uniform across all weekly options. Traders should carefully select contracts, particularly for newer indices like Nifty Financial Services and Nifty Midcap Select.
Weekly stock options on NSE are a low-cost trading strategy. Since their duration is short, you should leverage the market news and choose the contract accordingly. However, they do have some drawbacks. For example, you cannot trade in different asset classes.
No, weekly options are European-styled contracts and can only be exercised upon expiry.
Currently, weekly options are exclusively offered on indices, not individual stocks.
All positions in weekly options are cash-settled on the expiry day, streamlining the settlement process.
Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.