Personal Finance & Money Stack Exchange is a question and answer site for people who want to be financially literate. It only takes a minute to sign up.
Sign up to join this community
In an attempt to generate income from holdings, I generally screen stocks that trade options regularly. In my research, I have noticed that certain stocks have weekly options - but not always. For instance the JPM Option Chain offers weekly options, but, for some reason, does not have any weekly chains beyond the Apr 20 expiration. Another example is the P Option Chain, which lists options for May, June and then directly Sept., skipping July and Aug.
Is there a reason for these missing chains?
Short answer: Liquidity.
Well, you have to see it from an exchange's point of view. Every contract they put up is a liability to them. You have to allocate resources for the order book, the matching engine, the clearing, etc. But only if the contract is actually trading they start earning (the big) money.
Now for every new expiry they engage a long term commitment and it might take years for an option chain to be widely accepted (and hence before they're profitable). Compare the volumes and open interests of big chains versus the weeklies and you'll find that weeklies can still be considered illiquid compared to their monthly cousins.
Having said that, like many things, this is just a question of demand. If there's a strong urge to trade July weeklies one day, there will be an option chain. But, personally I think, as long as there are the summer doldrums there will be no rush to ask for Jul and Aug chains.
The answer is actually very simple: the cost of data. Seriously. Call the CBOE tomorrow and ask yourself.
They have two big programs: 1) the penny pilot program, where options trade at penny increments instead of 5 cent increments. This is only extended to a select few symbols because of the amount of data this can generate is too much for the data vendors.
Data vendors store and sell historical data. The exchanges themselves often have a big data vending business too.
2) the weekly options program, where only select symbols get these chains because of the amount of data they will generate.
Liquidity and demand are factors in determining if the CBOE will consider enabling those series on new issues. (although they have to give the list of which symbols are on these programs to the SEC)
All openly traded securities must be registered with the SEC and setup with clearing agents. This is a costly process.
The cost to provide an electronic market for a specific security is negligible. That is why the exchange fees per electronic trade are so small per security. It is so small in fact that exchanges compensate price makers partially at the expense of price takers, that exchanges partially give some portion of the overall fee to those that can help provide liquidity.
The cost to provide an open outcry market for a specific security are somewhat onerous, but they are initiated before a security has any continual liquidity to provide a market for large trades, especially for futures.
Every individual option contract must be registered and setup for clearing.
Aside from the cost to setup each contract, expiration and strike intervals are limited by regulation. For an extremely liquid security like SPY, contracts could be offered for daily expiration and penny strike intervals, but they are currently forbidden.
