4

Does sat/sun also decay the value of options or just days the market is open?

8

Yes it does!

The market prices this in on Fridays

And even better, on three days weekends and other holidays the additional time decay gets priced in causing option decay to happen even faster on the day before the market is closed.

This happens because options still have utility on days the market is closed. If there is an earthquake in Japan on a weekend and you have put options on the Nikkei index, you will still get the utility when the Nikkei drops 80% when the market reopens

  • What do you mean by "...you will still get the utility"? – 4thSpace Feb 6 '15 at 18:47
  • @4thSpace utility as in the option does what it is supposed to do: increase in value almost exponentially! Options should be treated like insurance, where the insurance runs out at a certain time so the policy decreases in value till it is no longer useful (has no utility). The market prices this in on days the market is closed because the options become less useful the closer it gets to expiration no matter what. But someone that already has that option will still get a payout if the market moves in the right direction – CQM Feb 6 '15 at 19:16
  • So I think by utility you mean return since that is all we care about. But I see your point about the weekend. However, I write options so I definitely want them to go down. "Utility" works both ways. Depends on your position. – 4thSpace Feb 6 '15 at 20:07
-2

Yes, it does.

Options are a contract to buy a certain asset at a certain price in the future. The contract doesn't say "but only between 9-5 on weekdays!". You can execute it any time.

The market is closed on the weekends, and likely so is your broker. But these are mainly services that facilitate trading. They are not a fundamental aspect of the trading. For example, nothing is stopping you from showing up at your friend's house on Saturday night and trading stock and options with him. You just won't have the convenience of the exchange and broker helping you actually do it. For most people, not trading on the exchange through their broker is a silly idea. But it's possible. Because of this you cannot "freeze time" on the weekend - those days are actual time value even if you as a retail trader cannot take advantage of it.

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