The Winning Way To Play Options During The Holidays

| December 16, 2019 | 0 Comments

optionsBack in 1992 when I was a market maker on the floor of the Chicago Board of Options Exchange (CBOE) and Board of Trade, a crazy event occurred; Lake Michigan started pouring into underground tunnels and flooding the city in what became known as the Great Chicago Flood.

Most of downtown, including the exchanges, were closed for three days. For the agricultural futures markets in which Chicago was basically the main exchange, it essentially shut off all trading activity in corn, soybeans, and wheat.

For people like me that had short options positions — in which time decay was your best friend — this was truly a godsend.  It was like going into a time machine and dialing the clock forward.

The reason I share this tale is with the holiday-shortened weeks coming up is that many people might think if you sell an option, the day before Christmas Eve and buy it back after Christmas that it would be an easy way to make some time decay money.

Most people think so because it seems that every bad educator has shown people this graph:

options

So if the market is closed for two days and options decay every day and I sell an option before its closed, I should bank money, right?

Now, we are all busy with travel, family, and Santa, so the market usually ends up being really quiet.

Why wouldn’t I sell the day before Christmas Eve and buy it back after?

It looks like l would collect several days of decay with very little risk.  Meaning, there is free money the week of Christmas in the way options decay.

WATCH OUT!

But hold on. This type of thinking puts a huge smile on the face of the market-making firms like Goldman Sachs (GS) or Susquehanna.

Unlike the Chicago flood, which was unpredictable, these guys own calendars too.  They know the markets will be closed and start chipping away at the decay several days ahead.

Without getting too deep into the mechanics of how options and time decay work, advanced market-making firms have ways to make options ‘time travel.’

You think it’s Monday, but it is actually Thursday to Citadel.  This means you are selling what you think is “expensive,” when, in reality, it’s cheap!

By the time you get around to collecting your options “Christmas bonus,” Goldman has moved on to the next day and you are none-the-wiser.

In other words, there is free money from options decay the week of Christmas, but you do not get it.  The market-making firms do!

So, what can you do to get the ‘free money?’

  • Sell options earlier. Most holiday premium is gone seven days ahead of time.  Thus, if Christmas is a Wednesday, the ‘day off’ premium has been priced out by the previous Thursday.
  • Buy options on the day of a holiday.  Play their game by buying low and selling high.  The option holder gets to have their options for WAY cheaper than they normally would in a normal trading week.

So, you can get ‘free money’ from options and… be like the market makers!

Note: This article originally appeared at Option Sensei.

 

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Category: Options Trading Strategy

About the Author ()

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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