One of the most important things to understand about options before trading them is that options lose value every day.
Do options lose value over the weekend? Options lose value over the weekend just like they do on other days. Long weekends add even another day of depreciation due to time decay, which is measured by Theta.
This means that a trader can have a very slight edge by selling options on Friday, only to buy them back the following Monday. When first learning how to trade options, many traders have thought of this simple strategy at one point or another.
But when they’ve asked others for answers as to whether options really do lose value over the weekend, they’ve often gotten conflicting answers.
Many traders disagree over whether options lose value over the weekend. After several decades of trading options both in my career and personally, I can assure you that options do lose value over the weekend.
In this article, we will explore what the arguments are on all sides of this issue, however. This way, you can decide for yourself how or whether you want to take advantage of weekend time-decay in trading options.
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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 disagreement among traders about whether options lose value over the weekend.
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 their expiration date.
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 it gets to option 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
It’s simply not logical that options wouldn’t lose value over a weekend since options expiration has gotten two days closer with the passing of Saturday and Sunday.
Time value is one of the two major elements of option pricing and it is based on how close an option is to its expiration date, at which time it becomes completely worthless after the market close even if the option is automatically exercised.
The Argument That Options Don’t Lose Value Over The Weekend
Just to be fair, I’ll present the other side of this argument for the other options traders who 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 other factors can have much more of an impact on option pricing than time decay and I agree.
Unexpected events or global activities before the U.S. market opens on Monday can have a huge impact on an option’s price. This is because the price of the underlying stock changes in response to such activities.
In this case, the intrinsic element of pricing has changed, but the time decay has still occurred.
Do options lose value over the weekend? Even though some traders take one position and others argue the opposite point of view, time decay is very real over the weekend causing options to lose value.
In other words, there is no weekend break for options.
But one thing is clear: other factors can affect option pricing more than time decay over two and a half days.
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 options 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 the weekend time-decay.
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“Time Decay” by the Options Industry Council, https://www.optionseducation.org/advancedconcepts/theta, accessed 5-3-2019