No decay over weekends?

[qlai]

I am experimenting with short straddles on weeklies. My preference, not backed by any data, is to sell them on Wednesdays. I was wandering if I would be better off selling Friday to Friday instead.

Found below article, but I don’t know if I trust the research.

“Novice options traders are usually disappointed if they try to profit from Theta decay over the weekend. If the underlying doesn’t move, options prices typically open on Monday unchanged from the Friday close. Commentators explain this phenomenon noting that market makers, not wanting to be stuck with Theta losses over the weekend, discount prices, overriding their models before the weekend to move their inventory—just like a fruit vendor would.”

https://sixfigureinvesting.com/2014/10/option-weekend-decay-and-volatility-annualizing/

Would love to hear opinions of more experienced players on the topic.

 

[BlueWaterSailor]

Would love to hear opinions of more experienced players on the topic.

I don't know if I'd call myself a more experienced player, but the OIC (Options Industry Council) has a clear statement about it:

"Pricing models take into account weekends, so options will tend to decay seven days over the course of five trading days."

https://www.optionseducation.org/advancedconcepts/theta

TastyTrade ran a study/backtest that confirms this:

http://tastytradenetwork.squarespace.com/tt/blog/theta-decay-weekend-effect
https://www.tastytrade.com/tt/shows/options-jive/episodes/theta-decay-over-the-weekend-10-03-2017

 

[qlai]

Thanks for replying! It sounds like they came to the same conclusion - while decay may be there, it's compensated/overshadowed by the added volatility over the weekends.

"As it turns out, there is risk that exists over the weekend, because the standard deviation range for weekends (Friday to Monday) during the period studied was +/- 0.75%. The hosts basically extrapolated from the data that a given option’s premium already accounts for weekends.

Therefore, there doesn't appear to much advantage (if any) to deploying a strategy that focuses on adding theta just for weekends - for example, placing a trade on Friday with the intention of taking it off on Monday."

 

[Sig]

It might be worth investigating if MMs should take all their theta off before the weekend? Doing so 100% would only be results neutral if nothing ever happened to move the market over the weekend. Intuitively I'd guess that's not correct. Certainly things happen far less over the weekend, but they do happen.

There may be a slight statistical edge over hundreds of trades if you take advantage of MMs shortcutting to compress theta decay into the trading week when they should technically be letting a little decay over the weekend. Not something a retail trader could get rich on, but it would be an interesting topic from an academic perspective and might be a slight tailwind for you if you kept it in mind?

 

[qlai]

Certainly things happen far less over the weekend, but they do happen.

For some reason it feels like weekends is when major news come out. One reason I can think of is that most retail investors don’t follow markets day to day, but they do over weekend. So you see heavy selling or buying on Mondays which sets the mood for the rest of the week.
That’s why I prefer selling on Wednesday as Friday usually dead.

 

[BlueWaterSailor]

For some reason it feels like weekends is when major news come out.

Even when Friday is not dead, and I see what looks like a good trade, I'm somewhat unlikely to enter - especially toward the latter half of the day. I might be able to scalp something short-term if I open one in the morning, but exposing myself to that weekend risk for nothing? No thanks.

 

[Overnight]

...I might be able to scalp something short-term if I open one in the morning, but exposing myself to that weekend risk for nothing? No thanks.

Aww come on. Nothing wrong with the weekends! (P.S. I always imagine you as the guy who forgets to move the decimal one place to the left, inadvertently. Whoops! Stupid mundane details!)

 

[JamesJ]

I remember in Spring when big Covid News often hit the wire on weekends and there were multiple sell offs and rips up on mondays.

So definitely not calm at all, at least now...