The Fourth Dimension
Vol #16- November 20th, 2020
Time isn’t linear, and there’s no better example than the next 6 weeks.
January 1st is only 43 days away, but it feels like a lot less than 11% of the year is remaining.
With Thanksgiving on a Thursday, Friday gets crumpled into the weekend, so that’s one less trading day. Holidays and New Year's Eve mean extra time off. While the math says there are still days remaining in the year, it already feels like there isn’t much room left in 2020.
This has a funny effect on the options pricing model. Arithmetically there are still a certain number of hours and days that the market is going to be open. It’s barely fewer than any other 43 day period.
Slow days make time bend in curious ways. Because there is still potential for a news event - whether in an individual stock or the broad market - options must retain some of their value. But if “everyone knows” that “nothing happens”, how much do you really want to pay for those options?
Options already decay in a funny way. We say time isn’t linear because options don’t lose the same amount of value every day, most of that value comes out at the very end. So long as there’s a little bit of potential, that option will have value.
While it might feel like the end of the year is upon us, there’s still plenty of opportunity left.
Thanks for joining us,
Mark Phillips
CEO
Happy Friday!
One of the slowest days on Wall Street is the day after Thanksgiving. It’s only half a trading day, Black Friday sales flood inboxes, and everyone’s thinking about leftovers.
Other than retail, Wall Street is one of the few industries to turn on the lights that day. What’s the point of keeping open?
While it’s only a rule of thumb, the equity markets endeavor to close for no more than 4 days at any given time. Three day weekends are allowed, but any longer is considered too much.
The root of this policy comes from concerns about how quickly prices are able to react to information. It seems quaint in a world of 24/5 trading, and constant information at our fingertips, but early market participants worried that too much information build up would swamp price action when the markets did open.
This concern is not unwarranted, even today we see news events happen between Friday at 4pm ET and Sunday night when the futures open cause big jumps. The US election earlier this month was a good example, with the Saturday news of Biden’s win causing the futures market to open up nearly 3% once trading came online the next evening.
Jumps in prices are good for long holders, but generally the smooth dissemination of price action helps all participants benefit from tight and stable liquidity.
There have been a few exceptions to the rule about four day closures. Hurricane Sandy in 2012 left the NYSE closed for two week days in a row when downtown New York lost power. Even on Wednesday when it opened, the floor was one of the few places in lower Manhattan with lights - not even the traffic lights were on.
The other major exception was September 11th, when the market shut down for the remainder of the week, and didn’t open until Monday September 17th. The first day of trading saw the Dow Jones average fall by over 7%.