Saturday, March 30, 2013

Option Portfolio Theta time decay over weekends

Last Monday, my portfolio exhibited a relatively bigger profit change than what I expected as described in my previous post. It generated my interests in understanding how my portfolio P&L could change over weekends and holidays. After some studying, I'd like to summarize my initial findings here.

  • At the portfolio level, the P&L changes with regard to SPX price changes may be larger if the non-SPX positions make bigger changes than normal (Beta), since the portfolio P&L used Beta-weighted Greeks. The Beta is an average calculated over a long time (1 year for TOS?)
  • Weekend Theta decay starts around Friday, depending on the market condition at the time and on the market makers.
  • Weekend Theta decay on Fridays does not show up in our Theta fields of the trading software, since our SW calculates Theta daily.
  • Weekend Theta decay on Friday shows up in our option volatility reducing as the time value decreasing causes option price decreasing. This is the only way (?) we know if market markers have started weekend Theta time decay (if the true market IV does not change much).

To understand how the portfolio Theta changes with volatility, I used the TOS analyzer to see Theta increases as IV decreases as shown below. Beyond the BE zone, the Theta and IV relationship is probably meaningless since the option strikes are too far OTM to have meaningful Greeks.
Since Theta and IV move in the opposite direction, it would make sense for market makers to hold off the Theta time decay over the weekends that major events are expected to happen. In this way, market maker's manipulation of option prices is supported by both the Vega and Theta at the time of high volatility.


  1. Excellent Post. Thanks for your analysis and thoughtful conclusion...

    Even in non event period, it would be beneficial for market maker (I am assuming option writer is making market) to hold off theta decay till the end of session on Friday, so as to collect maximum premium...what are your thoughts?

  2. Beta would be 5 year where fast beta would be 1.