Friday Pyrite

Backtest Notebooks

There’s Monday and there’s Tuesday…

Of all the pieces of fundamental information that should be baked into even the least efficient of markets, the days of the week feel like a pretty low bar. Even lower than open interest. Yet in Euan Sinclair’s benchmark Positional Options Trading from 2020, he cites the weekend effect in volatility markets.

Sell Friday and buy Monday should be stamped out, but there’s still some edge in it. In so many respects volatility is well priced, but that’s not an absolute or ubiquitous truth.

So why should the weekend have a bit of a premium quirk? Is it because there’s still a bit of art to pricing just how differently weekend theta should decay than other overnights or during market sessions? (Check out Kris’s recent post for more details.) Maybe you’re just short the really big announcement risk that hasn’t hit yet. Regardless of the answer, it’s very important to understand why your edge is there, and why it’s likely to persist.

If I can’t wrap my head around risk premia - I don’t want to touch it. Too good to be true is an absolute truth, and “it just works” isn’t a recipe for sleeping well.

Which leaves me scratching my head at a trade idea I recently discovered. With a name like Friday Gold Rush, clearly this is just designed to sell subscriptions. How could there be any structural reason why gold prices tend to go up on Fridays?

My knee jerk hypothesis was perhaps this is the day some banking function needed to adjust reserves into the weekend. But it also feels like those are the same guys that would stamp out an arb? The best explanation I found was that the jewelry industry liked to buy their raw material into the weekend. Hmm….

This week in Backtest Notebooks, we’ll talk about how to apply an options strategy to trading the Friday Gold Rush. There actually is something to the idea of higher prices on Friday, and the options even show it, but you’ll get chopped up in the details of sizing and slippage.