Time decay is an important concept in options trading which states that all options lose value as time passes. However, some traders believe that options lose value on weekends the most. Some traders have tried to build a strategy around this belief, but is it true? Do options depreciate over weekends?
Options do decay over the weekend. The extent of the decay remains a debate; however, most believe it to be a very small and insignificant amount during the weekend, as time decay is generally priced in on Friday when traders sell just before market close.
In the rest of this article, I’ll look closely at all you need to know about this argument to help you decide if you should create a strategy around time decay or not.
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Table of Contents
What Is Time Decay?
In options trading, time decay refers to the erosion of value as time passes. Traders describe how time affects the value of an option niche using the Greek numeral Theta. Other Greek terms used in options trading that reflect changes to price include:
- Vega: This refers to any variation to the option’s price due to implied volatility.
- Delta: This refers to fluctuations in the option’s price due to movements in the price of the underlying asset.
- Gamma: This is the speed of change in Delta for every unit of price change in the underlying asset.
Theta only measures changes to the options price as a result of time-decay and doesn’t include changes caused by other variables. There are various factors affecting the value of any specific option per day. This is why it’s harder to measure Theta directly. It’s also one of the reasons for the lack of uniformity on this topic.
However, there are a few things options traders are sure about when it comes to how Theta typically works. They include the following:
- Options Theta must always be a negative value, since options often lose value as they get closer to expiry.
- Options that are at-the-money often have the highest value of Theta. This means time elapsing negatively affects an option’s price the most if it’s currently at the money.
- Theta is always closer to zero for options that are a lot more out-of-the-money or in-the-money.
- Theta’s absolute value increases as any option draws closer to its expiration.
- The passage of time negatively affects the price of an option as the expiration gets closer.
Considering the above, it’s understandable that many traders often look at how Theta affects options prices during the weekend.
Do Options Depreciate Over the Weekends?
There are three general beliefs on how Theta affects options during the weekend, thus causing depreciation. Some believe options do lose value over the weekends; others believe they do not. Most, however, believe time decay over the weekend is too insignificant to matter.
Options Lose Value on Weekends
Some traders believe options typically lose value during the weekend because time still passes and trading doesn’t halt completely during these days. The main stock exchanges are not open; however, over-the-counter trades can still go on. Some brokers in the industry also provide after-hours trading as an extra service.
The presence of this trading volume—albeit small—is why traders believe options decay over the weekend.
However, if this is the ultimate reality, more traders would have strategies based around selling options before the weekends and buying them back on Monday.
Options Don’t Lose Value During the Weekend
Another group of traders believes options don’t lose value during the weekend because the weekend time-decay has been priced in.
Traders holding options know there’s a chance of losing some capital if they hold onto the position going into the weekend. This is why they sell the options before the broker closes trading for the week, which effectively means pushing off options positions at a price lower than normal.
Doing this means the time-decay doesn’t actually happen over the weekend, as everything is priced in during trading on Friday. This position is backed by the fact that options prices don’t always change a great deal over the weekend.
Time Decay Over the Weekend Is Insignificant
The most popular argument made by traders claims any depreciation in options value over the weekend is inconsequential. It’s believed that time decay has already been accounted for or priced in during Friday trading, and only a tiny fraction remains. Ultimately, this is an unproductive approach to trading, as profit is incredibly difficult to obtain.
Indeed, the reason time decay is so widely believed to be insignificant over the weekend is because this claim is backed by data. A look at how options prices change during most weekends show that assets often open at around the same value from the previous Friday. The only exceptions occur when underlying assets on the options had significant price changes. Yet even then, it’s unlikely to find price changes of more than 1%.
Since statistics don’t show time decay during most weekends, many argue it’s either too inconsequential to worry about or simply doesn’t exist.
Can You Create a Strategy off Weekend Time Decay?
As I mentioned above, some traders look at time-decay and immediately calculate the probability of profit by buying back options on Monday after selling just before the weekend. However, as many quickly find out, this isn’t a sustainable strategy.
There’s usually very little price change on most weekends, and spreads are typically wider on Fridays. Instead of trying to take advantage of time-decay, explore trading approaches that will help you make money during the week. Also, try to use strategies that can price in weekend moves within the underlying asset.
Standard technical analysis methods can work in this case. Any analysis is done on the underlying asset before picking the corresponding options.
If your strategy accounts for holding positions over the weekend, it’s best to stick with it instead of stressing about what may happen over the weekend. As we’ve seen above, when any changes happen, it’s often very infinitesimal.
When Is Time Decay Over the Weekend Likely?
If you’re trading assets that can be affected by economic events, it’s best to keep an eye on fundamental releases and the overall political climate.
For example, holding Crude options on a weekend when an oil-related summit is scheduled may not be a good idea. Any resolutions reached at the summit can affect the price of Crude, which is the underlying asset of the options. Depending on how the meeting affects the underlying asset, the market may open on Monday with significant decay.
Oil is just one example. Stocks and currencies can also be affected in the same way if a significant event directly affecting them occurs during the weekend. Savvy traders avoid this type of time decay by not holding options with scheduled economic events over the weekend. This helps reduce their overall risk significantly.
In general, a strategy based on time decay alone is highly unlikely to yield any positive, long-term results. Whereas, building a strategy that combines technical and fundamental analysis is likely to generate far better results.
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There’ll always be some argument over whether options decay over the weekend. I have yet to see a trading strategy that successfully exploits any time decay over the weekend. However, I’ve also seen lots of evidence supporting the theory that very little decay occurs over most weekends.
So, if you’re thinking about creating a strategy around weekend time-decay, it’s best to explore other options. Other approaches to trading options will most likely yield more tangible results.
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