The value of an option decreases each day, assuming that neither the price of the underlying or implied volatility (IV) changes. This is represented by the option Greek known as Theta. The market is closed on the weekend, so is it possible to “capture the weekend decay” by selling option premium on Friday and closing the position on Monday?
Our research team conducted a study in SPX (S&P 500 Index) from 2005 to present. They isolated events in which the SPX moved less than 0.1% and the VIX moved less than 5%. Using options with 45 days to expiration (DTE), we sold the at-the-money (ATM) SPX Straddle on Friday and closed it the following Monday.
A table of the SPX weekend Short Straddles was displayed. The table included the percentage of expected Theta collected and the percentage of weekends where Theta overstated decay. The table showed that although the trades made money, they collected 34% less decay than expected. The study used the best case scenario of a small movement in the underlying and IV. Large moves in the underlying would result in worse results.
For more information on weekend decay see:
Market Measures on December 23rd, 2014: “Weekend Decay”
Market Measures on May 5th, 2015: “Weekend Theta”
Market Measures Notebook on July 28th, 2015: “Debunking Weekend Theta Decay”
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the important takeaways which answer the age old question of whether or not selling options into the weekend to capture the Theta Decay makes sense or not.
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