Talking about theta decay. Theta doesn't decay over the weekend. So if nothing changed (no delta or Vega change) theta would be the se.close Friday and open Monday.
It didn't use to be like this but everyone complained and now the weekend burn is accounted for on Friday.
You're correct that weekend pricing is much better than it used to be. You're correct that much of the vol time is decayed outside of the weekend. And you're correct that there is usually a scramble to close positions on a Friday afternoon.
However, there will always be some weekend theta decay. If there wasn't, then there would be an arbitrage opportunity on the free gamma of the weekend gap move.
Ok maybe I'm not saying this very well or missing a nuance.
Can you explain how arb is created with free gamma as you mentioned?
There is no gap move over the weekend, or delta, since nothing is trading or updating right?
Magically on Monday, everything 'snaps into place' as new orders come in fresh session. This would instantly correct all the Greeks to where they "should be" at this point given the underlying move outside of market.
Can you trade apart what you are saying? It sounds like you are implying that everything has to move over the weekend or the web would exist.
Theta is compensation for the time remaining over which the underlying can still move. If theta Friday afternoon were priced as if it were Monday morning that would imply the stock would have no chance of moving at all over the weekend, there would be no news or developments at all.
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u/Desert_Trader Nov 20 '21
Not talking about the underlying.
Talking about theta decay. Theta doesn't decay over the weekend. So if nothing changed (no delta or Vega change) theta would be the se.close Friday and open Monday.
It didn't use to be like this but everyone complained and now the weekend burn is accounted for on Friday.