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Why Selling Option Premium on Friday is Stupid if You Just Want Theta! Ep 242

In this post, we’re going to take a look at why it’s silly to sell option premium if you’re thinking about getting that theta on a Friday for the weekend.

A lot of traders think that Friday is a good day to sell option premium. They believe that because they are going to get Saturday and Sunday to be able to make more money on Monday. 

What Most People Think?

Take a look at the software. We put on a trade (Netflix), and today we’re neutral on the position. Let’s say we take this out a few days; we’re making $7-$8 a day.

We get to that Friday, and we think we’ll probably make another couple of bucks, two days worth of theta. That could be $16 worth. That’s what most people think, and then by Monday, I’m up to $55. That’s what most people think. But that is wrong.

That’s not the way that things work when we look at option trades. 

Looking at Theta Decay

Of course, the theta decay and let me share with you this theta. If you haven’t seen this picture, you will see it very soon within your options education or right now. Normal theta decay looks like this.

If you look at it and then it decays, it indicates quicker. 60 days, let’s say 30 days, and let’s say 0 days – you’re exponential.

When we look at weekends and weekdays throughout the week, the decay looks like that.

Then it slows down, and then a little bit further. It’s a little bit funky in that way because what happens is that market makers know that there is a weekend coming up.

Don’t think that you’re going to be the smartest guy out there, and you’re going to be able to sell option premium out of Friday and go out on a Monday and make a bunch of money. If that is the case, everybody would be doing it. But that’s not the case. You can’t just put on a trade on a Friday and get out on a Monday. Frequently by the time you try to sell a trade (selling option premium calendar iron Condor), that weekend is already budgeted and priced in. And they start doing this way earlier on. 

Maybe even late Wednesday or Thursday to tweak the volatilities. They move them a little bit up and down based on what they need. And they can also shift the days. Now I’m not a market maker. I’ve never been a market maker. However, from all the things I’ve studied from, the things I’ve learned from, the coaches I’ve talked to, from the gurus I’ve spoken to and listened to this is how it works.

I’m going to try to simplify it for you because I haven’t seen too many videos and content on this. Let me share with you how this works on paper.

Price in Pit – Explained

We can start thinking about the volatilities in the pit, and you can do it based on volatilities. But let’s look at pricing because it comes down to pricing in the pit.

Start looking at pricing. Let’s look at Wednesday, Thursday, Friday, Saturday, Sunday, and Monday. Here’s our week and I’m going to draw a few lines for you here.

We’ll use the first group as our control group. This first one will be our control group.

When you think of theta decay, you think prices will go down. If a price and contract is $4.70 and you’re trying to buy option premium eventually, it gets lower and lower with time. It gets to $3.70 and so on.

We’ll use this concept just so to make conversation’s sake easy. And to think about it in an easy way. That’s what we usually think about. If this is our control group, let’s say we’re starting with our option premium. I’m going to do fast decay so that it’s easier to see. Let’s say we’re starting at $6.90 – that’s the value of the option. Think of it as the same strike. You can say the $8 strike. This could be a call. It could be a put.

I’m just trying to illustrate the example for you. Then on Thursday, you would think now it should be $6.20 – that’s the price of the option. Then on Friday, it should be $5.40, and Saturday, we’re down to $5.

Sunday, we’re down to $4.20, and then on Monday, you should be at maybe $3.60 or something along those lines.

That could be the prices as far as theta goes. Let’s look at pricing because that’s what it comes down to what you’re buying and paying for the option. That’s our control group, and that’s what it should be. This is the world that we should live in if everybody were nice if everybody was doing what they should be doing. 

But that’s not the world we live in. That’s because market makers know that there’s a weekend coming up. What happens is they can tweak the days and look at it in terms of the days being different or tweak the volatility.

I think the volatility is more difficult to explain on paper. So, I’m going to show you the days, but everybody can do it a little bit different in terms of the pits and these option markets. But this is to give you an illustration of how they may think about it. 

The next thing happens more towards the end of the day on Wednesday. Not at the beginning because it’s too early in the week. But at the end of the day, they might start looking at they have the weekend coming up. Let me see if I could dump or get rid of or buy what I need to buy more at the Thursday pricing because they’re looking at their software.

The price right now is $6.90, and it’s going to be $6.20. Let me see if I can sell things maybe around somewhere in between there – about $6.45. They’re already starting to look at that next day. On Thursday, the price should be $6.20. But they start looking Friday to Saturday.

At the beginning of the day, they might start looking more along the lines. Friday pricing is going to be around $5.40. So I might do $5.80 for now towards the end of the day you might get $5.60 or so because they’re already budgeting in the weekend that’s coming up.

They’re already looking at the next day. As more sellers are coming in (option sellers or people looking to trade options), they’re looking and pricing them further out in time. So they’re shifting their days. And as you get closer and closer to Friday, the more it shifts. Basically, by the end of the day on Friday, they’re looking at Sunday or Monday pricing.

Sunday, it should be around $4.20 and then $3.60. What they’re going to do is already price it at on Friday you should be getting that $3.80 pricing – that’s at the end of the day.

At the beginning of the day, you might be getting more like that $4.20 pricing. That shift happens, and of course, there are no trades that take place Saturday or Sunday. That’s why they have to budget this price because they know that Monday’s coming up.

They’re looking at that, and this is already canceled out in their software. That’s what they’re doing. They’re looking at it completely different: looking and projecting in time forward.

Understanding What Market Makers are Doing

I hope that kind of makes sense and gives you some ideas. It’s no secret here, but I wonder if your mind is a little blown. Because for some people – they don’t get this concept. They don’t understand that these market makers have to make some money. They’re in business, and they’re trying to do some things.

Trying to sell things on a Friday an option premium – can you do it?

Yeah, you can if you know and understand your pricings there’s nothing wrong with doing things on a Friday. There’s nothing wrong with putting on trades on a Thursday. But what I don’t want you to think about is this: I’m going to put this trade on a Thursday or a Friday to capture and make a lot of premium over the weekend.

You’ll probably still get some premium over the weekend. But it’s not going to be as much as you perhaps project or as much as you probably think. Instead, go in it with a clear mind understanding that you’re probably going to negate some of that weekend profitability. But you might get some benefits out of it, and it’s not going to be huge. And it’s probably not going to be as much as your software projects.

That’s the case because the market makers are already predicting and projecting for the weekend that’s coming up. They know and understand that the market is going to be closed for a couple of days.

And if there’s a Monday that might have a holiday, they’re thinking about that as well.

You can’t outsmart the market makers because they’re projecting it, and they’re putting that into place. They’re budgeting their pricings into that. And what you’re going to get on your trade might be tweaked a little bit.

Don’t go in thinking you’re going to rob them because you won’t. Instead, understand that you need to be a little more careful putting on your trades on that late Thursday and Friday. But you can still do it if you want to get into a trade.

And if you still need to get into a trade, if you need to hedge a trade, there’s nothing wrong with doing that – it’s just you have to understand that the prices are slightly adjusted to counteract for that weekend situation.

Final Word

I hope this makes sense and gives you some insight into putting on some trades there as we approach the weekend.

You always think about that in mind before you put on trade because market makers are thinking about these things and changing the prices slightly to counteract for that.

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