Short Straddle

My son is helping me do some analysis for my trading.   He gets the data and does the calculations so that I can decide if there is anything to trade.  We looked at a number of stocks that are announcing earnings next week.  We found a good trade in Priceline.

I sold some Priceline straddles today.

The Event

They are announcing earnings next Tuesday which makes the implied volatility high, around double the historical volatility.  I sold the options far enough away from where the stock is trading that I am protected from moves up to three or four standard deviations of one day price moves.  I also have time decay working for me.

It looks like a good trade.

We’ll see.

Time Decay

We’re going into a long weekend and next week is expiration week.  From the end of the trading day today, until options expire next Saturday at 5 PM, is 192.5 hours.  It is noon now in New York, so there are four and a half more trading hours left to Friday.  Then there is the rest of Friday night, seven and one half hours. Saturday, Sunday, and Monday is 72 hours.  So from the end of trading today there is 79.5 hours of weekend and nine and one half hours until the market opens Tuesday.  That gives us 89 hours out of the remaining 192.5, really we shouldn’t count the Saturday that options expire, since there is no trading on Saturday.  So that would give us only 168 hours until the end of trading Friday.  For 89 out of those 168 hours there is no trading.  That is a little more than half the time remaining.

But options are decaying as the clock is ticking.

Weekend Volatility

Volatility doesn’t go away completely over the weekends.  Remember the weekends last Fall when the Federal Reserve or the Treasury had a new plan to announce every Sunday.  That led to gap openings on Monday morning.  Typically, the volatility over the weekend is less than one half the weekday volatility.

Today is a good day to sell February series options.