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, and when it comes to decay, there is nothing I love more than taking advantage of a holiday. As you know, markets will be closed on April 18 for Good Friday, and since this is a holiday, markets will enjoy a three day weekend. This is a 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, that 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 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 volatility declines into a holiday, and with the recent rise in the markets, I suspect this will again be the case. Earnings season is getting underway big time next week, and it also just happens to be options expiration.
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 AAPL, CELG, AMZN and 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!