Sub-Weekly Equity Options Arrive Monday.  Huzzah?

A week ago, without fanfare, the SEC approved a change to the options market.  In May, Nasdaq, via its ISE subsidiary, applied to add sub-weekly expirations to a select group of individual equity options.  After some industry discussion and a robust comment period, the SEC approved the application.  Starting this Monday, we should expect to see Monday and Wednesday expiration dates added to a select group of individual stocks.  Traders should be aware not only of the potential opportunities, but also of some unique risks that could arise.

The rules specify a few listing criteria for eligible stocks.  They must have:

• a market capitalization of greater than 700 billion dollars for an individual stock based on the closing price, or assets under management (“AUM”) greater than 50 billion dollars for an Exchange-Traded Fund Share based on net asset value (“NAV”); monthly options volume, as measured by sides traded in the last month preceding the quarter end, of greater than 10 million options; a position limit of at least 250,000 contracts; and participation in the Penny Interval Program.

From a practical viewpoint, this limits the initial list to the “Magnificent 7” and a few other names.  The initial listings are expected to be Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA), along with Broadcom (AVGO) and the Financial Sector SPDR (XLF). 

The list could change in coming months, and it is of course reasonable to expect that someone would apply to relax the listing criteria at some point in the future if this pilot is deemed successful.  Remember that Wednesday, and later, Monday-expiring options first arrived on a select group of index and ETF options in 2016, but it wasn’t until 2022 that Tuesday and Thursday expiries filled in the calendar for those names.  Considering the rapid adoption and popularity of so-called “0DTE” options, it would not be surprising if the industry were quicker to push for more stocks and/or days to add to the above list.

As I write this, the Options Clearing Corporation (OCC) has not finalized the listings, but we can expect two important things:

• Although Nasdaq ISE filed the rule change, the options should be available on all equity options exchanges.  Unless an option is exclusive to a specific exchange, such as the Cboe’s license of S&P indices, it is eligible to trade everywhere.  There is no exclusivity for individual equity options. 
• The new listings will specifically avoid posted earnings dates, which is meaningful because the new options will arrive during the current earnings season.  For example, do not expect to see META, MSFT, or TSLA options expiring this Wednesday, January 28^th, because all three should be reporting after that day’s close.  The same would apply to GOOGL on Wednesday, February 4^th.  AAPL is tentatively scheduled for Thursday, January 29^th, and AMZN is tentatively scheduled for Thursday, February 5^th.  AVGO and NVDA are not due to report for several weeks, and XLF, as an ETF, obviously does not report earnings. 

The avoidance of published earnings dates is a worthy attempt to minimize systemic and individual risks, but it is not foolproof.  The reason for this stems from a few crucial features about options expiration procedures that are of greater importance for single-stock options than index or ETF options.

Equity and ETF options settle “physically”, while index options are cash-settled.  In the era of daily expirations, the latter have become more popular.  SPX options volumes have eclipsed those of SPY because the index options only require money to change hands upon expiration, whereas the ETFs require those who experience exercise or assignment to take on positions in the underlying.  The advantages of cash settlement for daily speculators have become apparent, and individual equity options lack that feature. 

It is of the utmost importance for traders to recognize that options can be exercised or assigned up to 5:30 PM ET.  In practical terms, firms require notification to be given sometime prior to that time.  IBKR has a 5:25 ET cutoff, which is one of the latest in the industry, but professionals can offer exercise/lapse decisions until the last second.  That leaves 1.5 hours for post-close moves to affect one’s decision whether to exercise or lapse an expiring option.  Under normal circumstances, most traders are quite pleased to let their positions be automatically exercised and assigned by the OCC.  The clearing house exercises all calls where the official close of the underlying share is at least $0.01 above the option’s strike price, and all puts where the official close of the underlying is at least $0.01 below the strike. 

But stocks and ETFs can, and do, move after the market’s close but before the exercise cut-off.  If the stock is close to a strike, that can simply be the result of normal market movement.  A long options holder might opt to lapse, say, a $100 strike call if the underlying stock or ETF dips from $100.02 to $99.98, while a corresponding put option holder might choose to exercise.  A trader who is short that call might expect to be assigned but then discover that he was not, and a trader short that put might find themselves unexpectedly long shares.  This is referred to as “pin risk.”  This risk has been ever-present for as long as options have been expiring – since 1973, of course – but stocks typically don’t move much on Friday afternoons.

This is likely to change when non-Friday expirations arrive.  Meaningful corporate news can and does often arrive on weekdays after the close.  While it is admirable for the industry to avoid the “known unknown” of an announced earnings date, that does not fully immunize options traders – particularly writers – from profit warnings, takeover announcements, and big moves in sympathy to news from key competitors. 

For starters, we noted above that AMZN is tentatively scheduled to release earnings on Thursday, February 5^th.  If there are options listed on the 4^th and the company later decides to confirm that as the release date, those with positions will be exposed to a company with an average post-earnings move of 6.3%, which is currently about $15.  Or, consider the move that might occur in AVGO if NVDA significantly beat or missed its own guidance. 

While this sort of risk has existed for ETFs with non-Friday expirations ever since 2016, it is highly atypical for them to move so dramatically after the close.  Nasdaq’s filing uses the post-close experience of SPY on “Liberation Day” to show that even relatively huge moves in a key ETF were not a systematically significant risk event, but in conversations with their executives, I pointed out that even that move paled in comparison to a company’s profit warning. 

This means that anyone who trades these options needs to pay attention to stock market news well after the close and to be extremely vigilant about any short positions that could be affected by post-close moves.  For many traders, these incremental risks should not negate the appeal of trading the newly listed sub-weekly (though not quite 0DTE, yet) stock options, but no one should enter this activity without recognizing them.