SmoothSailing#10

When you sell an option on Friday for the next Friday, you’re looking for seven days of time value in your premium. But when/where does the time value for the two days of the weekend go? Are they discounted by Monday or on Monday? Since I didn’t know, long ago I experimented with selling options on Friday and holding back some, then comparing both sides on Monday to see if there was any difference, once you discounted any stock price movement. As far as I could tell there was very little difference. So this week I did some digging and I did find an explanation on the NASDAQ site. It turns out that yes, there are seven days of time value over the week Friday to Friday, even though the market is open only five days. Importantly for us, however, the market makers (the clearing agencies, about twenty of them) discount the weekend time value on Friday, not Monday, and sometimes even late Thursday, although that is rare. So that means if you’re going to roll out a week, Thursday is the day to do it. Once you get into Friday, you’ve already lost most of the time value for the weekend. Since anything can happen over the weekend, it’s probably better to just let your positions expire Friday and sell again on Monday. You don’t lose any time value premium but you do jump over the weekend, reducing your risk.

I did not know this. I’ve been rolling on Fridays, thinking I was getting that time value. But I confirmed this and my experimental trading shows the same thing, so when it works out, I’m going to try and get my rolling done on Thursdays.