Not only are we going to fill our bellies this week with fabulous food and give thanks, but we will also be able to take advantage of the holiday week in a unique way. As a frequent option seller, I love to jump on board and sell premium during Thanksgiving week. Why now? Burned time. Over the next five days, the markets are closed on Thanksgiving, half of Friday, and of course over the weekend. That means there is no better way to put the odds of winning in your favor.
Certainly option prices are cheap with a VIX hovering near 13%, but realized volatility is somewhat low. I will take my chances.
To paraphrase Robert Duvall in Apocalypse Now, “I love the smell of burning premium in the morning!”
That burning premium is a seller’s delight. It is the perfect time for options sellers to create options income, because the less time the market is open, the closer we get to options expiring worthless.
Let me back up a second and explain what this means. An option buyer constantly fights the clock on the way to profits, while a seller has the luxury of using time as a friend. The longer you hold out as a seller, the more premium you keep (you could even end up keeping it all!).
When we have the chance to take advantage of natural conditions, such as an extra day off, then I start looking for opportunities to cash in. Remember: Decay does not take time off and will continue through holidays and weekends. If you want to learn more, I have written articles about how to sell premium and selling option premiums during holidays.
Now, you might ask, “But Bob, isn’t the market already pricing this time decay into the options?” For some, yes. After all, implied volatility rises when there is uncertainty on the horizon. We all know when the markets will be closed, and options market makers adjust things based on pricing models. The three unknowns are the trend, momentum and direction of the market. Options are priced appropriately for certain time frames, but when overall volatility declines and the timeline shrinks, then options sellers gain the upper hand.
We often find that volatility declines around a holiday, and with the recent rise in the markets, I suspect this will again be the case. Earnings season is winding down, but there is a positive seasonality into the end of 2014.
So what am I looking for? Whenever I see a shortened week, I will look to sell some weekly (the following week’s) puts and/or call spreads on SPY, IWM, QQQ or DIA, along with some other names that look to have high implied volatility, such as Apple (AAPL), Celgene (CELG), Amazong (AMZN) and Netflix (NFLX).
I will look for ideas this week, hold them through the holiday weekend, and let the premiums just melt. At least, that is the plan!
