Buying Options over the Weekend
Unlike Bitcoin that is 24-7, the stock and options markets have opening hours.
Options gain or lose value over the weekend if there is drastic news impacting the underlying stock's price (e.g. adverse news of accounting frauds, or fire in the company's factory, etc).
However, if there is no underlying change to the stock price, the options price should not change. This is because the implied volatility (IV) and time value (theta) adjustment are already priced in gradually on Friday (i.e. accounting time decay of Friday Saturday, Sunday on Friday alone).
Regardless, some people have the practice of not holding any short duration options over weekends and many investment funds also sell their positions on Friday too.
In this article, you will explore how the trading option’s value changes due to the weekend.
Weekend Adjustments in the Option’s Value
In the world of trading, weekend adjustments are usually made on Friday and sometimes gradually over the weekdays
- The closing price on Friday will be the same as the opening price on Monday in theory
- Implied volatility should higher on Friday's closing but lower on Monday’s opening.
- However, the prices are usually not the same due to selling on Friday with theta priced in
- In this manner, people already adjust for the weekend decay.
On most weekends, nothing takes place in financial markets. So, options trader will sell put and call options and will try to earn time value decay for Friday, Saturday, and Sunday nights.
If it is a long weekend, selling will be more because of more time value decay. Because of this selling, the prices of the call and the put option will decrease. So, it results in lower implied volatility on weekends as compared to weekdays. In simple words, this phenomenon is known as the “Weekend Effect.” However, this implied volatility is restored to its normal position on the next market day.
Theta + Vega + IV
Theta only measures the option’s price that is caused by time decay. Theta has nothing to do with other factors. Vega measures the impact of the pricing caused by Implied Volatility.
Given that people already priced in the weekend effects, looking at Theta and Vega will explain why there is little to take advantage of in option pricing over the weekend.
Behavior of Theta
We know a few things about Theta. For example, for an option, Theta is always a negative number because options start to lose value when they approach expiration. Options that are at-the-money will have the highest absolute value of Theta. In other words, we can say that the passage of time will have the most negative impact on the option’s price if it is at-the-money. When the option is in-the-money or out-of-the-money, Theta tends to be closer to zero. During this stage, the passage of time will have less effect on the price.
When the option’s value approaches expiration, the absolute value of Theta increases, so it makes sense to ask whether Theta affects an option’s price or this effect increases on the weekend. So, the best solution for making money is to sell options on Friday and buys them back on Monday.
Does Theta Have An Effect On Options Prices Over The Weekend?
There are different arguments. One argument is options lose value over the weekend. And the second one is options don’t lose value over the weekend. All the major stock exchanges are closed, but traders must be able to trade with each other. Some option trader brokers offer after-hours trades as well. So, in such cases, volume for options trading is on the lower side, but it never means that it doesn’t exist.
Some traders argue the value lost by the options during weekends doesn’t matter. According to this view, most of the time, decay is priced in on Friday. A little bit of value that is left behind is a waste of time to try to profit from it. As it is mentioned earlier, the price changes on weekends are very rare. Price changes of greater than 1% are very rare on weekends. So, that’s why traders argue that either it is nonexistent or too small that it doesn’t matter, considering other fees.
More Explanation of Theta
Either short term or long term option holders must be familiar with the effects of Theta on the option’s price. Theta is represented in the dollar’s form. Theta is calculated on a daily or weekly basis.
Theta is used to tell how much the option’s value will decay per day or week, with all the other factors remaining the same. Theta is not linear. It goes on decreasing when the expiration time is near. The amount of time decay indicated by Theta will be gradual at first, and it accelerates when it reaches near expiration.
The Relationship between Implied Volatility and Theta
The implied volatility also affects the Theta. In general, the higher the IV levels, the greater the Theta value. All the money options will have exposure to time decay. It can be short or long. Option values that are deep in the money or out of the money will have very little decay because they have less time premium.
Do trading options lose value over the weekend? Unfortunately, we don’t have a clear answer to this question. Some traders take the side of this question, and others oppose it. But one thing is clear; time decay wouldn’t affect the option’s value as much as the other factors do. So, it is not recommended and a good strategy to sell options on Friday and repurchase them on Monday.
When the option is near to expiration, the value of Theta is decreased. Perhaps it would be better to pay attention to financial news, technical, and other fundamental strategies. The option traders make these arguments. Now the choice is yours and decides it by yourself. We can summarize the article as Theta doesn’t decay much over the weekends and holidays when the markets are closed.
Sky Hoon. Read Full Bio
Website Owner, Twitter-er
He has been trading since 2008. He started this blog to share the journey about option trading. He dabbled in stocks, bitcoin, ethereum (in Celsius Network), ETF (lazy Dollar Cost Averaging) and also built websites for fun. He used this as a platform to share my experiences and mistakes in trading, especially options which I just picked up.