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How Can GME IMPLIED VOLATILITY Change over the Weekend? Explained

Why are #Gamestop options IV changing over the weekend?

DD thread 🧵

Several people are claiming to be options "experts" and believe that IV goes up over the weekend all the time.

This is inherently and unequivocally false!

Market makers can trade over-the-counter (OTC) 24/7, but the extent and nature of this trading can vary based on several factors. Here's an overview:

OTC Trading Basics

• OTC Market: Unlike traditional exchanges with fixed trading hours, the OTC market operates through a network of dealers and brokers who negotiate directly. This market is less centralized and regulated, allowing for more flexibility in trading hours.

Market Makers and 24/7 Trading

• Market Makers: These entities provide liquidity by being willing to buy and sell securities, typically maintaining an inventory of the assets they trade. They play a crucial role in both the OTC and exchange-traded markets.

Key Points About 24/7 Trading

• Flexibility: OTC trading can technically occur at any time, including weekends and holidays, as long as there is a willing counterparty. This means market makers can engage in trading activities around the clock.
• Liquidity: Liquidity in OTC markets can be lower during off-market hours (nights, weekends) compared to regular trading hours. This might affect the bid-ask spreads and the volume of trades.
• International Markets: Market makers might engage in OTC trading across different time zones, taking advantage of international markets that are open when their local market is closed.

Practical Considerations

• Technology and Infrastructure: Advanced trading platforms and algorithms enable market makers to operate 24/7, responding to market conditions and executing trades outside traditional hours.
• Regulatory Environment: While OTC markets are less regulated, market makers still adhere to regulatory standards and reporting requirements, which can vary by jurisdiction.

Examples

• Cryptocurrencies: A prominent example of a 24/7 market where market makers are active around the clock is the cryptocurrency market. Cryptocurrencies trade continuously, and market makers provide liquidity at all times.
• Forex: The foreign exchange (forex) market is another example where trading occurs 24/5 (almost 24/7), with market makers playing a significant role.

Conclusion

While market makers have the ability to trade OTC 24/7, the actual level of activity depends on market conditions, liquidity, and demand. Technological advancements and the global nature of financial markets facilitate continuous trading, but practical limitations such as liquidity and regulatory considerations still play a role.

OTC trading by market makers over the weekend can indirectly affect options contracts, but there are several nuances to consider. Here's how this might work:

Impact on Implied Volatility (IV)

• Anticipation of Monday's Opening: If significant OTC trading occurs over the weekend due to major events or news, it can lead to increased anticipation of volatility when markets reopen. This anticipation can be reflected in the implied volatility of options.
• Adjustments by Brokers: Brokers may adjust the implied volatility of options over the weekend to reflect any significant OTC activity or anticipated market movements. This adjustment can happen through internal algorithms and models that take into account the latest available information.

Direct Trading of Options

• Options Market Hours: Traditional options markets are not open over the weekend, so you cannot directly trade options on most exchanges during this time. However, information and sentiment from OTC markets might influence opening prices and volatility on Monday.
• OTC Options: Some sophisticated investors and institutions might trade OTC options, which are customized contracts not listed on formal exchanges. These can be negotiated at any time, including weekends, though this is less common.

Practical Effects

• Pre-Market Activity: OTC trading over the weekend can set the stage for pre-market activity on Monday. If there's significant movement in the underlying asset's price, it could lead to gaps up or down when markets open, affecting options pricing.
• Volatility Adjustments: Market makers and brokers might update their models based on OTC trading. If there's significant trading indicating potential volatility, IV for options might increase, even if there's no actual trading happening in the listed options market.

Examples

• Cryptocurrencies and Forex: In markets like cryptocurrencies and forex, which trade continuously, significant weekend activity can influence related options markets. For instance, if Bitcoin experiences a major price swing over the weekend, Bitcoin options IV might adjust accordingly in anticipation of market reopening.
• Global Events: Major geopolitical events or economic news released over the weekend can lead to OTC trading that impacts sentiment. This can cause adjustments in IV for options related to affected assets.

Conclusion

While options contracts themselves do not trade over the weekend, OTC trading by market makers and significant events can influence implied volatility and the pricing of options once markets reopen. Brokers might adjust IV based on weekend activities and anticipated market movements, indirectly affecting options contracts. Traders should monitor relevant news and global markets over the weekend to better anticipate potential impacts on their options positions.

If you're noticing implied volatility (IV) increasing on a Sunday while the markets are closed, several factors might be at play, even though there's no actual trading occurring. Here are some potential reasons:

Anticipation of Market-Impacting Events

• Upcoming News or Events: If there are significant events expected to happen over the weekend or on Monday (e.g., economic reports, geopolitical events, earnings announcements), traders might anticipate increased volatility once the market opens. Brokers might adjust IV to reflect this anticipated uncertainty.

Broker-Specific Models and Adjustments

• Algorithmic Adjustments: Some brokers have algorithms that continuously update IV based on various inputs, even when markets are closed. These algorithms might factor in historical data, patterns, or upcoming events that could impact volatility.
• Technical Updates: Brokers might update their models or systems over the weekend, leading to changes in IV calculations. This could include incorporating new data or adjusting parameters within their volatility models.

Market Sentiment and Expectations

• Market Sentiment: Changes in global sentiment or major developments in international markets (which might be open while the local market is closed) can lead to adjustments in IV. For instance, if there is significant news in foreign markets, it might impact the expected volatility of related assets.
• Speculative Adjustments: Sometimes, the perception of risk or uncertainty might change over the weekend, leading to higher IV. This could be due to news articles, analyst reports, or social media discussions that influence market sentiment.

Practical Considerations

• Trading Algorithms and Hedging: Institutional traders and market makers might adjust their hedging strategies over the weekend, which could affect IV calculations. While they can't trade, they might adjust their models in anticipation of Monday's open.
• Delayed Reflections: Sometimes, what appears as a change on Sunday could be a delayed reflection of adjustments made late on Friday after market close.

Example Scenarios

• Pre-Earnings IV Increase: If a company is set to report earnings on Monday, IV might increase over the weekend as traders anticipate volatility around the earnings release.
• Geopolitical Tensions: If there are rising geopolitical tensions or major developments in international markets over the weekend, IV might be adjusted to reflect potential impacts on the underlying asset.

In summary, while actual trading does not occur over the weekend, brokers might adjust IV based on various factors that could influence market conditions once trading resumes. These adjustments are often speculative and reflect anticipated risks and uncertainties. If you observe significant changes in IV over the weekend, it may be beneficial to review news and events that could impact the market or contact your broker for more specific details on how they calculate and update IV.

Implied volatility (IV) doesn't necessarily increase as an option approaches its expiration date; it can either increase or decrease based on several factors. Here's a more detailed look at how IV behaves as expiration approaches:

Factors Influencing IV Near Expiry

1. Upcoming Events: If there are significant events (earnings reports, economic data releases, etc.) expected before or around the expiration date, IV can increase as traders anticipate potential price swings. This is often seen with earnings announcements where options' IV rises as the date approaches due to uncertainty.

2. Decreasing Time Value: As expiration nears, the time value of an option decreases (theta decay), which can sometimes lead to a decrease in IV if no major events are anticipated and market conditions are stable.

3. Market Sentiment and Supply/Demand: Market demand for options can also influence IV. If traders expect large price movements, demand for options can increase, driving up IV. Conversely, if the market expects little movement, IV can decrease.

4. Volatility Smile/Skew: The pattern of IV across different strike prices can also impact how IV behaves. For example, out-of-the-money options might see different IV changes compared to at-the-money options as expiration approaches.

Typical Observations

• Before Major Events: IV often rises before known significant events due to the anticipated volatility.
• Quiet Markets: In the absence of anticipated events or news, IV can decrease as expiration approaches due to the certainty of the outcome (i.e., the stock price will either end up in-the-money or out-of-the-money).

Practical Examples

• Earnings Announcements: A stock with an upcoming earnings report might see a spike in IV as the date approaches, reflecting increased uncertainty.
• Normal Expiry with No Events: For options without any upcoming significant events, IV might decrease as expiration nears due to the reduction in time value and decreasing uncertainty about the stock's price movement in the short term.

Conclusion

IV behavior as expiration approaches is not uniform and depends on the interplay of multiple factors. While it can increase in anticipation of events or due to market demand, it can also decrease in stable conditions with no expected news. Traders should closely monitor these factors to better understand and anticipate IV movements.

What if the market opens Monday and gme hasn't increased in price?

For me, nothing. I continue to buy and hold.

Zen.

Happy Father's Day, Kings!