When beginner traders first learn about time decay, they almost immediately think: “Why don’t I sell options on Friday, pick up the time decay over the weekend, then buy them back on Monday”.
Unfortunately, in real life things are not always this simple. There’s no free lunch after all.
In this article we’ll look into time decay and whether traders can profit by selling options on Friday, only to buy them back the following Monday.
Theta is one of the option greeks and as option income traders, it’s one of our favorites. Theta describes the effect of the passage of time on an option position.
Positive Theta means the position is decaying as time goes by (good if you’re a net seller of options).
Negative Theta occurs when you’re a net buyer of options and this mean time decay is costing you, because the options you own are decaying.
As an option get closer to expiry, the effects of time decay become more pronounced
Unless you’re VERY new to options, you probably seen a chart like this many times before.
WEEKEND TIME DECAY
The generally accepted argument these days is that weekend time decay is priced in to the value of options. Some people say this occurs as early as Thursday afternoon.
Sure, back in the 80’s when option trading was relatively new, people were probably making a killing off this strategy. But market participants quickly become aware and the edge soon disappeared.
From all reports, there hasn’t been an edge in selling options prior to the weekend since the early 90’s.
Sorry guys, as I said earlier, there’s no free lunch in this game.
Do options lose value over the weekend? Possibly a very minuscule amount and it’s probably so small that it wouldn’t be worth trying to profit from it.
Most of the weekend time decay is baked into the price of options as early as Thursday afternoon.
While it might seem like a great idea at first, trying to profit from weekend time decay probably isn’t the best option strategy. Instead focus on learning more about things like delta neutral trading, wheel trades, hedging, and low risk / high rewards trades.
Part two of my free webinar series is on August 6th when I’ll be sharing with you The Secret To Generating Consistent Income With Options – Even If You Work Full-Time.
There will be lots to cover and plenty of opportunity to ask questions.
You can register for the webinar below.
Best of luck traders and trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.