I think most people would agree that there are enough days off in the year. Who doesn’t like time away from work? But as traders or investors, days off when the market is closed during the week present opportunity and possibly an edge. Let’s look at how we can take advantage of implied volatility (IV) skews when there is a short week of trading.
Using Time Spreads
A long time spread involves selling an expiration and buying a longer expiration. The most important part of the trade is for the stock to close at the short strike’s expiration. To get an edge as an option trader, we prefer to sell more expensive premium than we are buying. In other words, sell high and buy low. The cost and potential risk will be less than if the IV levels were the same or if the IV is higher for the long option than the short option.
A Holiday Means Lower IV Skews
When there is a market holiday, IV skews tend to be lower for that week because of fewer trading days. That means an option trader can sell an expiration before the holiday week and buy the expiration of the holiday week. Here are a couple of examples we explored recently in MTM’s daily group coaching class. (Note the market is closed June 19 in honor of Juneteenth or Freedom Day.)
AAPL
On Apple Inc. (AAPL), we modeled out a long call calendar. We sold the 200 call for June 13th expiration (the expiration before the holiday) and bought the 200 call for June 20th expiration (June 19th is the holiday). Notice the IV level for the short option is 32.86%, and the long option IV is 27.46% (see below).
PLTR
Here is another example in Palantir Technologies (PLTR). This one is a 136 call calendar. Notice the IV for the short strike is once again higher than the long strike (see below).
Final Thoughts
IV skews are present even when the short and long expirations have the same amount of trading days. But when there is a short week of trading due to a holiday, the odds of an IV skew grow much bigger. As an option trader, it is up to you to take advantage of this.
John Kmiecik
Senior Options Instructor
Market Taker Mentoring
