weekend theta
Friends,
The “weekend effect” in options refers to the tendency of implied vol to increase on Mondays.
Why does it happen?
First, perplexity.ai provides not only a decent start. In fact point #5 is quite impressive and clue-y.
The trading implication, point #6, is somewhere in between incomplete if you know what you’re talking about to dangerous if you are a novice reader. I’ll address later in the post.
Perplexity does admirably but it doesn’t get to the core.
My condensed summary:
The weekend effect is a mathematical artifact that presents itself as “implied vol increases on Monday”.
Why?
Empirically, from Friday’s close until Monday’s open, options typically do not decay as much as the model’s theta would predict.
Therefore, to fit the the Monday a.m. option price, the implied vol must necessarily be higher than it was on Friday.
This post will explain why this is a mathematical artifact as opposed to a real change in the IV.
If the upward change in IV is an artifact, then does that suggest that an unchanged IV means vol is actually down?
Yep. Sure does.
Right now this tweet is a puzzler:
I’m going to explain it in detail.
And for your part, you’ll walk away understanding weekend theta and volatility time in a new way.
This post is going to get you over the line by zooming in on weekends in a basic way.
However, you could reconstruct all the ideas if you deeply understand this benchmark post:
In that post, we start high and you can use it pinpoint how to think about weekends.
In this treatment, we zoom in on a weekend and you could use that to scaffold your own construction of the high-level post.