Why I Love Holidays

 | Apr 14, 2014 | 9:45 AM EDT  | Comments
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To paraphrase Robert Duvall from Apocalypse Now, "I love the smell of burning premium in the morning!"

Actually, 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. It's a perfect time for the option seller to create some options income because the less time the market is open, the closer we are to options expiring worthless.

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, the more premium you keep (as a seller), perhaps even keeping it all. So, when there is a chance to take advantage of a natural condition such as an extra day off (remember, the decay will be three days including the weekend), then I start to look for opportunity. 

We will have two more three day weekends to come by early July.

You could argue he market is already pricing this into the options. For some, this is true. After all, implied volatility rises when there is uncertainty on the horizon and clearly we all know the market will be closed and options market makers adjust based on pricing models. The unknown is the trend, momentum and direction of the market. Options are priced appropriately for certain time frames, but when overall volatility declines and the amount of time is reduced then option sellers gain the upper hand.

We often find volatility declines into a holiday and with the recent rise I suspect this will again be the case. Earnings season is getting underway big time next week and it is also 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 SPDR S&P (SPY), iShares Russell 2000 (IWM), PowerShares QQQ Trust (QQQ) or SPDR Dow Jones Industrial (DIA) and some other names that look to have high implied volatility, such as Apple (AAPL), Celgene (CELG), Amazon.com (AMZN) and Netflix (NFLX).  I will look for ideas all this week, holding through the holiday weekend and let the premiums just melt (well, at least that is the plan).

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