All-Time Highs Are All-Time Highs

Yo Pit Crazies,

Yes, I know it’s Tuesday and the markets were closed on Monday.

That’s called a holiday — and I hoped you enjoyed it.

It also underscores a phenomenon known as the “weekend effect” for options.

If you ever wondered why traders don’t sell on Friday and buy back all the cheap options on Monday week after week as an easy way to print money, read on …

There is a trick and you can learn it.

Moving Vol

Traders move volatilities … and I used to do it all the time.

How do they move volatilities, you might ask?

All the quotes that appear on option screens in trading platforms are generated by liquidity providers, not the exchanges.

The Chicago Board Options Exchange (Cboe) does not generate a single quote, it just aggregates the quotes from the various providers.

The retail trading public, forever known as “paper” because that is what your orders used to arrive on the trading pit on, sees the collection of quotes provided by the computers.

For instance …

SPDR S&P 500 ETF Trust (SPY) closing Friday quotes expiring July 06.

The way the liquidity provider creates quotes is by having total control of the inputs:

      • Time to expiration
      • Volatility
      • Underlying Price

They can change any of these inputs in their systems to manipulate options prices.

So, if a liquidity provider changes the date on the time to expiration by moving it forward a day, the option price drops by the theta per day.

Remember: The Greeks measure option price sensitivity to a number of factors. Theta is the Greek for price movement for a one-day change in time to expiration.

Notice above, that the value of the SPY July 06 433-strike call and put is about $1.70 added together …

Recall, this was Friday’s close, with four days to go to expiration. Just $1.70 in a $433 product is a little low.  

Notice, too, in the cMIDIV column, that IV is 5.92% …

That is less than .25% mover per day for four days to expiration — and very low. For instance, SPY moved 3.29 on Friday alone.

The only explanation is that the liquidity providers “TOOK THE WEEKEND OUT” early and, in fact, did so on Thursday and Friday …

They compressed five days of decay into two by moving the time to expiration forward aggressively both days.

Working for the Weekend

Implied volatility looks at the trade date, not the date the LPs put into the model.

Since the option price is very low, that will register as a low implied volatility.

So, today at the opening bell, the trade date and expiration date will be the same again and the IV will “pop” even though the option values will do nothing.

Today, take a look at the opening values on the SPY straddle and tell me what you see …

If SPY opens near where it closed, the options prices should be pretty close, less a little decay, to where they closed on Friday.

The Lesson: Sometimes liquidity providers will over decay options very early in the week and that is usually a good time to buy them as I noted in this recent post.

Now you know why the options can get so cheap and that selling on a Friday to buy on a Monday or Tuesday is not the free lunch it would appear.

The Rundown

Power Moves Portfolio w/ Frank Gregory
Option Pit DC and Wall Street insider Frank Gregory and I run a portfolio approach to trading options with stocks that have good long-term prospects based on Frank’s K Street knowledge and my options expertise.

The live trade log is here, and I’ll have a full recap for you every Wednesday.

To Your Trading Success,



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