Does Theta Decay Over the Weekend?

Introduction

Theta decay is a critical concept in options trading, referring to the gradual decrease in an option’s value as time passes. One common question is whether theta decay occurs over the weekend. Let’s dive into this topic to gain a better understanding.

Theta Decay Overview

Theta decay, expressed as a negative value, signifies the daily reduction in an option’s value due to time passing. Options models factor in weekends, attributing seven days to each week despite only five trading days.

Weekend Theta Decay Example

Using the SPX option chain as an example, let’s explore how theta decay unfolds over the weekend. Consider an option expiring on Monday, where theta (-2.56) indicates a daily value decrease. By Monday, the option’s value decreases significantly due to accelerated theta decay over the weekend.

Conclusion

Theta decay indeed occurs over the weekend, contributing to the overall pricing dynamics of options contracts. Understanding how theta decay affects options pricing during weekends is crucial for options traders.