Do options lose value over the weekend? If so, maybe a trader can profit by borrowing options and selling them short on Friday, only to buy them back the following Monday.
Many beginning traders have thought of this strategy at one point or another. But when they’ve asked others for answers, they’ve often gotten conflicting answers.
The reason why this question is hard to answer is that traders disagree over whether options lose value over the weekend. In this article, we will explore what the arguments are on all sides of this issue. This way, you can decide for yourself how or whether you want to take advantage of weekend time-decay in trading options.
Understanding Options Theta
Options traders use the Greek numeral Theta to describe the effect of time on an option’s value. This is one of the four “Greeks,” the others being Delta (changes to the option’s price caused by changes in the underlying asset’s price), Gamma (the rate of change of Delta per unit of underlying price change), and Vega (changes to the option’s price caused by implied volatility).
Theta measures only the change to an option’s price caused by time-decay, not changes caused by other factors. Since there are many factors acting on the price of an option each day, this makes it difficult to measure Theta directly. This is part of what leads to the disagreement.
Still, we do know some things about how Theta must behave. For example, we know that Theta for options is always a negative number because options lose value as they approach expiration.
We also know that the absolute value of Theta is highest for options that are at-the-money. In other words, the passage of time has the most negative impact on an option’s price if it is at-the-money. The more an option is in-the-money or out-of-the-money, the closer to zero Theta tends to be, and the less effect the passage of time has on the price.
In addition, the absolute value of Theta increases as the option approaches expiration. The closer an option gets to expiration, the more negatively the passage of time affects the price.
Because of this, it makes sense to ask whether Theta has an effect on options prices or even whether this effect increases on the weekend. If it does, we should be able to make money by selling options on Friday and buying them back on Monday.
But does Theta have an effect on options prices over the weekend?
The Argument That Options Lose Value Over The Weekend
Some traders argue that options must lose value over the weekend. After all, weekend days are still days. And traders can still trade on the weekend. The major stock exchanges are closed, but they can still do over-the-counter trades with each other.
Some options brokers even offer after-hours trades as an added service. So even though volume for options trading is lower, this does not mean that it is nonexistent.
The Argument That Options Don’t Lose Value Over The Weekend
Other option traders argue that options do not lose value over the weekend. According to this view, traders who are holding onto options on Friday know that they will lose money if they don’t exit their positions. This makes them want to get rid of their options before the market closes.
As a result, they are willing to get rid of their options at a lower price than they otherwise would be. This causes the weekend time decay to be “priced in” on Friday. Because of this, no time-decay actually occurs on the weekend.
The Argument That The Value Lost Doesn’t Matter
Another argument many traders make is that the value lost by options over the weekend doesn’t matter. According to this view, most of the time-decay is priced in on Friday, and the little bit that is left over is so small that it is a waste of time to try to profit from it.
These traders often rely on empirical research to support their claims. If we look at price changes on options over weekends and exclude ones whose underlying assets had price changes, we find that these options often open on Monday near the same price they were on Friday. And it’s extremely rare for these options to have price changes of greater than 1%.
Since the empirical evidence does not show any time-decay over weekends, these traders argue that we have to assume it is either nonexistent or too small to matter.
Do options lose value over the weekend? Unfortunately, there is no clear answer to this question. Some traders take one position and others argue the opposite point of view.
But one thing is clear: if there is time-decay over the weekend, it probably doesn’t matter as much as other factors.
Because of this, trying to profit from weekend time-decay by selling options on Friday and buying them back on Monday may not be the best options trading strategy.
Instead, using technical and fundamental analysis, paying attention to the financial news, and using other trading strategies is probably better.
Regardless, these are the arguments made by option traders on all sides of the issue. Now that you know these arguments, you should be able to decide for yourself whether you want to try to profit from weekend time-decay.
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“Time Decay” by the Options Industry Council, https://www.optionseducation.org/advancedconcepts/theta, accessed 5-3-2019