Do options decay overnight?

Pricing models in the financial markets, particularly those related to options trading, are designed to be comprehensive and incorporate various factors that can influence the value of an option. One such factor is the effect of weekends on the pricing dynamics.

This lack of a uniform approach to modeling time decay can lead to discrepancies in the valuation of options across different platforms or by different financial institutions. As a result, investors need to be aware of the specific methodologies used by their chosen pricing models to accurately assess the potential impact of time decay on their option positions.

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Given that weekends are non-trading days, pricing models account for this by considering the passage of time during these periods. This means that options, which inherently have a time value component, will experience a natural decay over the seven days that encompass five trading days.

This phenomenon, known as time decay, is a fundamental aspect of options pricing. It reflects the fact that as an option nears its expiration date, its time value diminishes, making it less valuable to the holder.