Time decay includes weekends, exchange holidays?
- Thread starter a529612
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Quote from a529612:
Does time decay occur during weekends or exchange holidays or only when the market is open for business? If it does happen over the weekends, wouldn't you get some free time decay money if you short on Fri and buy to close on the following Mon?
Time decay never stops, because anything can happen at any time. Events on a weekend or holiday can definitely have an impact on the markets, even though they may not be open.
Options are insurance: sellers are taking the risk in exchange for premium, and buyers are throwing off the risk, paying premium in the process. Even if your insurance company is closed, your insurance still is in effect. Same with options.
Good luck.
Quote from a529612:
If it does happen over the weekends, wouldn't you get some free time decay money if you short on Fri and buy to close on the following Mon?
yes, you would get time decay over the weekend. of course, you need a very large position to make it worthwile. this is why many large firms try to get out of long options prior to a weekend...saving millions.
I've known guys that have blown-out on decay and vol into the weekend before LTD of the cycle. I was drinking one Friday a week before expiration with a friend who was a cboe local. We were discussing our exposures and he calmly mentioned that he was short $90,000 thetas. He lost $300,000 over the weekend when the spot traded in a tight range that Monday.
Quote from a529612:
Does time decay occur during weekends or exchange holidays or only when the market is open for business? If it does happen over the weekends, wouldn't you get some free time decay money if you short on Fri and buy to close on the following Mon?
Market makers adjust the pricing models going into the weekend, so holding everything else constant the price of an option won't change from friday close to monday open. Theoretically, decay is a continious process, in reality the weekend decay is taken out prior to the weekend.
Yep, just watch the premiums dwindle this afternoon.
Many times they actually do this Thursday at the close, especially during the summer. Sorrry guys, no free lunch.