Do Options Lose Value Over the Weekend?

"Do options lose value over the weekend?" Shyam asked, eager for a conclusive answer. 

In a bustling coffee shop, two friends, Ram and Shyam, get engrossed in an intriguing discussion over a small question, "Do options lose value over the weekend?"

As two friends sat at a bustling coffee shop, their conversation took a mesmerising turn. Ram, a seasoned options trader, leaned in with a mischievous grin and asked his companion, Shyam, a novice in the world of trading, a puzzling question: "Hey Shyam, have you ever wondered if options lose value over the weekend?" 

Shyam furrowed his brow, his curiosity piqued. He took a sip of his coffee and replied, "I've heard that options lose value every day, but does that include weekends too?" 

Ram chuckled and nodded knowingly. "Exactly! Options do lose value over the weekend, just like any other day. But here's where it gets interesting—long weekends add an extra day of depreciation due to time decay, measured by a mysterious force called Theta." 

Shyam's eyes widened, captivated by the prospect of unravelling this enigmatic phenomenon. "So, you're saying that we could potentially sell options on Friday and buy them back on Monday, taking advantage of this time decay?" 

Ram nodded; his excitement contagious. "You've got it! It's a strategy many traders have considered. But here's the catch - when traders ask others about this, they often get conflicting answers. Some say options lose value over the weekend, while others argue otherwise." 

Intrigued, Shyam leaned in closer. "But how do we know who's right?" 

Ram leaned back, wearing an air of wisdom acquired through years of experience. "Well, my friend, let's delve into the depths of this debate and explore all the arguments from different perspectives. That way, you can make your own informed decision on whether to harness the power of weekend time decay in your options trading endeavours." 

Shyam eagerly awaited the unravelling of this mystery, his mind brimming with questions. Ram started by explaining the concept of Theta - the Greek numeral that encapsulates the impact of time on an option's value. He described how Theta measures only the change caused by time decay and not other factors, making it a challenging metric to grasp. 

Ram's voice became animated as he continued, "We do know that Theta is always a negative number because options gradually lose value as they approach their expiration date. The absolute value of Theta is highest for at-the-money options, where time has the most detrimental effect. The further an option is in or out of the money, the closer Theta tends to be lower, minimizing the impact of time decay." 

Shyam nodded, absorbing the information. "So, options that are deep in or out of the money would experience less Theta decay, right?" 

"Exactly," Ram confirmed with a nod. "And as an option approaches its expiration, the absolute value of Theta increases. The closer it gets to expiration, the more negatively time decay affects its price." 

Shyam's curiosity grew, and he couldn't help but ask, "If Theta has such an effect on options prices, wouldn't it make sense to profit by selling options on Friday and buying them back on Monday?" 

Ram chuckled, appreciating Shyam's logical thinking. "Ah, you've caught on to the heart of the matter! That's precisely the argument for options losing value over the weekend. With each passing Saturday and Sunday, options expiration draws nearer, resulting in theta decay. It seems only natural that options would lose value over the weekend." 

Shyam nodded thoughtfully, but a question lingered. "But what about the counterarguments? Why do some traders believe that options don't lose value over the weekend?" 

Ram leaned back, taking a moment to gather his thoughts. "Well, my friend, some traders argue that those holding options on Friday are aware they'll lose money if they don't exit their positions. This prompts them to sell their options at a lower price, effectively 'pricing in' the weekend time decay on Friday itself. In their perspective, no further decay occurs over the weekend." 

Shyam's brow furrowed as he contemplated the opposing viewpoint. "That does make sense, in a way. So, which side is right?" 

Ram shrugged a hint of mischief in his eyes. "That's the beauty of the trading world, Shyam. There's often no definitive answer. Traders make compelling arguments on both sides, leaving room for interpretation. But here's the kicker - other factors can significantly influence option pricing, overshadowing the impact of time decay." 

Shyam leaned forward, his curiosity deepening, urging Ram to explain further. "What other factors could have such a substantial impact?" 

"Ah, my eager friend," Ram replied, "unexpected events or global activities, before the U.S. market opens on Monday, can send shockwaves through the market. The price of the underlying stock can fluctuate dramatically in response. While the intrinsic element of pricing may change, time decay still occurs. This makes it clear that other factors can wield a more potent influence than time decay over a mere two days." 

As their conversation drew to a close, Shyam felt a newfound appreciation for the complexities of options trading. Ram's insights had shed light on the enigmatic nature of weekend time decay, leaving him with a sense of awe and curiosity. 

"Do options lose value over the weekend?" Shyam asked, eager for a conclusive answer. 

Ram's smile was wise and knowing. "Indeed, my friend. Options do lose value over the weekend. There's no respite for options traders during those precious days. However, it's crucial to remember that time decay isn't the sole factor governing option pricing. While the weekend may offer opportunities, there are no guarantees." 

Shyam nodded, absorbing the wisdom imparted by his experienced companion. "Thank you for sharing these insights, Ram. Now, armed with this knowledge, I can explore the intricacies of weekend time decay and make informed decisions in my options trading journey." 

As they left the coffee shop, their minds abuzz with possibilities, the allure of options trading lingered in the air. With newfound clarity and understanding, Shyam ventured forth into the world of options, ready to navigate the ever-changing tides of time decay, armed with the wisdom shared by his knowledgeable friend.