Sunday, April 3, 2011

Do Options Decay Over the Weekend?

I have heard several "experts" claim that options decay every day, weekends and holidays included. In my experience I have not found that to be the case. I have sold options on a Friday afternoon, sometimes even before a 3 day weekend, and have found that if the market re-opens at a similar level, the option price at the open is about the same as it was at the Friday close.

It makes sense for this to be the case, I would assume that market makers just use number of trading days in their options pricing model, so theta decay between Fri-Mon is just 1 day. Furthermore it seems to me that the theta decay in the market maker's model probably occurs sometime in the early afternoon on any given day, so all other things being equal the seller of an option at the end of the day should not expect to see any theta decay until the afternoon of the following day, not right at the open.

I am wondering if anyone has any different thoughts on this, and why some "experts" insist that options decay on weekends and holidays?

1 comment:

  1. Your understanding of it is correct. There isn't a golden rule or standard on exactly when or how much they start factoring in the weekend on Friday, but at the last tick on Friday they have fully priced in the weekend and/or holiday. So if you're looking to capture that three day theta decay you need to sell early on Friday morning. You have to assume they can't start too early or their prices would be too cheap and they either wouldn't see any volume if the prices were too low, or it would be lopsided with buys only if they went too low.

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