Preparing for the End of the Trading Week
You might not know this, but trading dynamics on Friday’s differ from other days of the week.
While these “Friday dynamics” are especially important for options traders to understand, stock traders need to keep them in mind as well.
Below I will break down some of these considerations and how you can better position your portfolio ahead of the weekend every single week.
Understanding Increased Gap Risk
Holding positions over the weekend increases your exposure to gap risk.
This happens because the market is closed on the weekend and does not have the chance to digest any news, headlines, or other catalysts that might happen on Saturday or Sunday.
This can create large gaps in a stock’s price on Monday’s open, causing you to lose more in a position than you thought you could.
There isn’t much you can do to mitigate this risk other than exiting all positions on Friday.
But that’s not practical for everyone, so its important to understand what catalysts you might be exposing yourself to by holding through Friday’s close.
If you want to trade one of these catalysts events, you may want to approach it with options. That way, you’ll be able to more easily define your total risk and exposure.
Time Decay In Options
For traders that do hold options over the weekend, many of them fail to understand one very important point: Time decay happens on the weekend, too.
Time decay is constant — the value of options positions erodes with the passing of time even when the market isn’t open.
So if you do decide to hold options positions over the weekend, you need to realize that with all else being equal, the value of the position will decline slightly by Monday’s open.
This becomes even more apparent in the last week before an option expires. If you’re looking to trade a catalyst for after Monday’s close, wait until the Monday session before putting the position on.
You don’t want to buy into the options ahead of the weekend and lose value due to time decay.
Other Considerations for Friday
If you trade options, Friday is also very important for expiration.
Equity options positions settle in the underlying stock.
If you hold an in-the-money option through the close on expiration Friday, you might end up with a big long or short stock position that you never wanted.
Once you have that position, there’s nothing you can do to exit it until Monday’s open; and you really have no idea what that exit price might be.
I’ve seen traders make mistakes around expiration that have cost them huge sums of money.
That’s easily avoidable by managing your expiration and knowing when your positions expire.
Unfortunately, Friday’s are not a great time to leave the screen early for the golf course. Trading requires your attention until the close everyday.
But remember these points and you’ll sleep easy over the weekend knowing your portfolio risk is managed and that you’re well positioned for Monday’s open.
AKA, “The Alpha Shark”