Theta and Weekends

Discussion in 'Options' started by shazam75, Jul 11, 2009.

  1. shazam75


    Hi All

    I see on morningstar website the theta values for a list of companies - this does theta value take into account the saturday and sunday or does one have to take the theta values and do the calculation for monday morning open.

    E.g, Theta at close of business is say -0.05 and the option price is $1.00

    Will the option price be 90cents (all else equal) on Monday ?

  2. Hi,

    Everybody knows there is a week end. Market makers too.
    So basically theta is already priced before saturday.
    Some traders price it friday afternoon, some friday morning...
  3. dmo


    Usually the weekend's time decay gets taken out before the weekend. If you suddenly see IV drop on a Friday, that's probably really the weekend's time decay being discounted. "Synthetic time" as somebody here called it.

    There's a play a friend of mine and I used to do when we were in T-bond options, when a big number was to come out first thing (7:30) Friday morning. IV would usually rise on Thursday afternoon in anticipation of the number. We would sell premium (straddles) into that rise. Usually the number on Friday morning was a dud - no surprise - and suddenly you would have the double pressure on IV of the number being out and the weekend coming up, and IV would sell off, usually into the early afternoon or so.

    Of course, sometimes the number was NOT a dud - and that could be painful.
  4. The clock always keeps ticking. Never stops.