Holiday Approaching, Free Time Decay Next Week?

Question: Holiday or weekend is coming, should I sell options before the weekend or holiday to get the decay?

Quick answer is to sell options when it’s part of your plan or strategy . Could any international events happen over the weekend that could derail your ingenious plan?

 

Question: Why are Market Makers so kind to me on Fridays and days before Holidays when they buy options from me and give me the decay?

Short answer: They aren’t being so kind. 

 

Question: Dan, what did you do when you were a CBOE specialist many moons ago, and retail traders lined up to sell options before the weekend or holiday? 

Answer with attempted humor: I begged them to go away and stop taking our money.

Real answer: When I saw the orders to sell rapidly come in, I would fill those first few orders. But I would then lower the implied volatility of the call and put bids and offers. If volatility is priced in correctly, it should not be one-way paper. By lowering my offer, I might be enticing potential buyers to send in orders.

 

Question: What did this ultimately mean to the enterprising retail trader trying to take advantage of the Pit guys?

Answer: Because the Pit guys possibly lowered the bids quite a bit as the big supply of sell orders came in, the pit guys were basically buying the options on Monday prices even though they traded on Friday.

 

Question: Do you mean if I sold options on Friday, I might have actually been selling them on Monday’s prices? 

Answer: definitely a possibility, AND you are taking the weekend risk. When the market opens Monday, I might raise the implied volatility to levels before the sellers came in the previous Friday. This might result in prices not that different from Friday AND 2 days have passed.

 

Statement, you are depressing me Dan? 

Answer: I’m sorry.

 

Question: As a retail trader, how can I be more on top of and prepared for how much market Makers will discount the prices on the weekend? 

Answer: Follow the implied volatility levels 2-3 days before the weekend and after the weekend, and compare to the Thursday and Friday before the weekend. See if waiting till Monday in some instances might be better and you avoid risk of something major happening over the weekend or Holiday and a big gap resulting after the holiday or weekend.

 

Any other suggestions?  

Answer: Yes, watch for options that maybe didn’t get lowered as much as the one you wanted to sell. If flexible, maybe you sell a different option or do a spread where you negate some of the implied volatility decrease. You would be potentially buying a cheaper option versus the cheaper one you are selling. Some moral victory!

Conclusion: Is the time decay party over? Will my options not decay over the weekend? Answer: The time decay party isn’t over and your options will decay over the weekend. Just understand a bit about the process and life will be more bearable for all of us.

Have a great Holiday weekend and enjoy the decay.

Dan Sheridan 

dan@sheridanmentoring.com