For anyone wanting to maximize timing for short options, trading on Thursday or Friday for the following week’s expirations (7 or 8 days away) is a good timing strategy.
According to Jeff Augen in his book, “Trading Options at Expiration” those options expiring in one week will lose (on average) 34% of remaining time value between Friday and Monday. With three calendar days but only one trading day in between Friday and Monday, the timing for short options is at its best.
A few caveats:
1. Price can move over the weekend. The greatest risk in this type of trade is that price can change significantly between Friday and Monday. Once Monday’s trading opens, there are only four days remaining until last trading day. But if the option has opened deep in the money, you need to roll forward or close and take a loss to avoid exercise.
2. The 34% is an average only. The statistic cited in the boo kin only an average, so it is not a 100% certainty that this level of time value will evaporate. But if the underlying price does not change significantly and you do see a 34% reduction, it can translate to a handsome profit.
3. When time value is minimal, a change will not be a big dollar amount. The level of premium in the option with only one week remaining to expiration may not be significant enough to justify the risk. You need to balance the time decay value against the risk, and for that the dollar amount in the option matters.
4. You need to post collateral to cover the risk. The requirement for uncovered short positions is 20% of the strike, adjusted for the amount of premium. This is cheaper than the 50% margin required to buy stock, adding to the value of leverage. But it also limits how many short options you can open. To find out more about the collateral rules, use two useful links from the CBIEW, both free. First is the margin calculator, which tells you exactly how much collateral is required for a particular option. Link to this free calculator at CBOE Margin Calculator — and second is the Margin Manual at CBOE Margin Manual
The timing of trades makes all the difference. Opening a short trade on Friday and closing in on Monday makes sense in two respects. First is the significant loss of time value over the weekend. Second is the equally important decision to buy to close and exit the position after the gain is realized. Too many traders set goals without any problem, but have difficulty in following their own rules. So exit and taking profits is just as important as when to get into a trade.
Timing is also crucial because by Monday there are only four days remaining in the life of the option. This means that very little further time decay can be expected in at-the-money options. So holding out for additional but minimal gains is not the best decision.