A while back on the Option911 blog (our former name) I wrote a piece about option time decay and the weekend (Read it here). The basis of the article was that by Friday, there was almost no point in selling option premium because the entire weekend was priced out of options ahead of the weekend. That has generally been the case over the last 2 decades of trading. However, there are periods of time where weekend decay does not come out of options completely.
During these time periods typically there is some sort of huge risky event that is coming up over the weekend. Things like Greek deals and war declarations. One can typically see these weekends coming because there is a clear evidence of something major about to happen. Things like votes, announcements, and scheduled conferences. On these days the VIX almost acts like stocks do ahead of earnings. Typically, there IV increases because the options DO NOT decay. Traders are trading a straddle price.
Then we have something like what happened the last 3 or 4 weekends (see the first chart below).
Ever since the Iranians began rattling their Kitara’s we have seen two sides battling in SPX volatility. On one side are the level headed traders that see the market doing nothing, and having options premiums that are WAY too high. These traders are following the normal path an option will take over the week (lower into the weekend and higher on Monday’s). However, on Fridays something interesting has happened, around mid day, the there are hedgers coming in looking to protect their butts from sort of even risk going on over the weekend. We don’t have anything specific, but just some unseen ‘threat.’ that is out there.
It is not completely evident in the chart above, but today’s VIX action illustrates the action pretty well (second chart down below).
Notice the vol surge around 2 pm EST. IT is like traders are putting weekend decay BACK into the SPX. If we consider that the weekend accounts for about .75% of any up move on a Monday, the movement up of over .5 point shows that they have a nice chunk of Saturday and Sunday in options.
Read more on our option mentoring and trading blog