time decay over the weekend, in practice.

At least in what I trade, I have not noticed much time decay over the weekend assuming that there are no major events occurring over the weekend. It's certainly far less than over two week days because the extra days are already priced into the option price from the beginning...weekends are a known event. One reason why is that although one might expect an option to be priced less at market open on Monday morning compared to Friday afternoon due to having less time until expiration, keep in mind that many traders are rolling over positions on Friday afternoon. Many traders will be selling new options once they realize that their current short options will expire worthless. And since most options apparently (I have heard and in my experience) expire worthless, that suggests that there will typically be more sellers than buyers on Friday afternoon. Of course, logic suggests that the opposite would occur if the underlying made a sharp recent unexpected move. But that's not really different than any other time. Whatever the reason, I have not observed much of a change in option prices between Friday and Monday morning unless VIX or underlying make a big move at the open.
 
ET180 said:
At least in what I trade, I have not noticed much time decay over the weekend assuming that there are no major events occurring over the weekend. It's certainly far less than over two week days because the extra days are already priced into the option price from the beginning...weekends are a known event. One reason why is that although one might expect an option to be priced less at market open on Monday morning compared to Friday afternoon due to having less time until expiration, keep in mind that many traders are rolling over positions on Friday afternoon. Many traders will be selling new options once they realize that their current short options will expire worthless. And since most options apparently (I have heard and in my experience) expire worthless, that suggests that there will typically be more sellers than buyers on Friday afternoon. Of course, logic suggests that the opposite would occur if the underlying made a sharp recent unexpected move. But that's not really different than any other time. Whatever the reason, I have not observed much of a change in option prices between Friday and Monday morning unless VIX or underlying make a big move at the open.
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How often have you seen the nearest itm option expire?
 
ET180 said:
At least in what I trade, I have not noticed much time decay over the weekend assuming that there are no major events occurring over the weekend. It's certainly far less than over two week days because the extra days are already priced into the option price from the beginning...weekends are a known event. One reason why is that although one might expect an option to be priced less at market open on Monday morning compared to Friday afternoon due to having less time until expiration, keep in mind that many traders are rolling over positions on Friday afternoon. Many traders will be selling new options once they realize that their current short options will expire worthless. And since most options apparently (I have heard and in my experience) expire worthless, that suggests that there will typically be more sellers than buyers on Friday afternoon. Of course, logic suggests that the opposite would occur if the underlying made a sharp recent unexpected move. But that's not really different than any other time. Whatever the reason, I have not observed much of a change in option prices between Friday and Monday morning unless VIX or underlying make a big move at the open.
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There's some literature on this that I don't have handy at the moment but worth a search in Google Scholar. From what I remember they found that so little happens to move prices over weekends that the realized lack of decay is what "should" be happening. That's counterintuitive to me, but the data convinced me.
 
I've heard the explanation from some options book that I read that market makers bring down option prices into the close on Friday, but I'm not sure that makes sense. I don't see how they could do that without carrying significant inventory over the weekend. Point is that if one could short an ATM option on Friday afternoon then close the position at next market open to capture any significant time decay then people would already be doing that as it's essentially an almost risk-free trade. One would simply short an ATM strangle and then close at next market open. What one side of the trade loses the other will gain (unless it's a large move), but both sides will lose premium to time decay.
 
Indeed, IV/prices usually come down on the Friday. You should look at what happens on the Friday of non-farm payrolls, especially in Europe the effect is quite interesting. IV moves up towards NFP and straight after is hammered for the weekend.

Then on the Monday, a little bit of IV comes back up, but not enough to get back the weekend theta. Unless there's an event the next week (earnings or so). Also, IV's comes back up a lot for expiring series on the Monday. Sometimes enough to get back full theta.

MM's run significant books with multiple hedges, so inventory isn't that much of an issue. And, if everyone lowers IV... there might not be any trades necessary to lower it. A shift in price is possible without trades being done...
If you would sell ATM straddles to take advantage of weekend theta, you as retail run significant risks. MM's always have hedges on and on their global book the risk of one stock moving on Monday doesn't have that much of an impact... it will on you though.

Little fact: most takeovers or bankruptcies are done over the weekend!
 
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