Leaderboard

I’m asked many times how weekends affect the theta. Is it true that if we buy a straddle on Friday, it will be automatically worth less on Monday due to the negative theta? The answer is no. Market makers have a system for marking the passage of time. In simple terms, the ticking clock speeds up as we move from Monday to Friday. The theoretical clock ticks much faster on Friday than on the previous Monday. Market makers are smoothing out the passage of time when taking into consideration that the markets are not open for trading on the weekends. If the option traders used the ‘true’ Friday theoretical values for their bids and offers, when Monday morning arrived each option would (assuming an unchanged sock price) be lower than on Friday. This would be especially obvious as expiration week arrives. To discourage others from ‘dumping’ option premium of Friday and repurchasing Monday, the passage of time used to determine the value of options is not measured in real time – at least not as weekends approach. Mark Sebastian discussed this point in detail (Option Pit).