This trade (and others) has been discussed in detail in Euan Sinclair’s Positional Option Trading (Wiley, 2020) book. We highly recommend reading Euan’s books as he provides practical guidance on Options Trading in great detail.
The Weekend Effect in options refers to the tendency of options prices to decrease more over the weekend than in their respective weekday period. Traders aware of the weekend effect can potentially profit by selling short-term options on Friday and buying them back on Monday at a lower price. However, this strategy also comes with risks, such as unexpected market events that could cause a significant change in option prices over the weekend. Therefore, it is strongly suggested (mandatory) to pair this trade with a hedge. We will cover hedging strategies in a later article. The validity of this hypothesis can be evaluated using MesoSim through a series of straightforward tests, which we are undertaking in the subsequent section of this article.
Note: The Tuesday expiration selection and Exit rules are present so that we can cover long weekends. In case of normal weekends, the Monday expiration and exit should be used.