Rolling Trades with Vonetta

Get the full season of Vonetta's new show! Watch as she learns to trade!

Watch Now

Options Jive

Monday – Friday | 8:40 – 9:00a CT

Decay | Longer Dated Options

Options Jive

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

A typical study we run will be a test of a premium selling strategy such as a short 1 Standard Deviation (SD) Strangle using the options expiration cycle closest to 45 days to expiration (DTE). Why shouldn't we use the longer dated options to open new positions and where is the highest ratio of premium decay to risk? What makes 45 DTE the best choice?

A graphic comparing the price of at-the-money (ATM) short Calls with 110 DTE, 75 DTE and 45 DTE over a 30 day period was displayed. The graphic compared the rate of theta (time decay) on the Calls. The graphic showed that while the longer dated options have a higher premium, the decay of shorter term options is much larger in percentage terms.

A table of SPY (S&P 500 ETF) 1 SD Strangles with a 30-day holding period from 2005 to present was displayed. The table compared the average P/L per trade, average P/L per day and percentage of profitable trades on short Strangles with 45 DTE, 75 DTE and a 110 DTE. The table showed that Strangles with a 45 DTE had the highest average P/L per trade and highest P/L per day.

A 10 year graph comparing the running P/L on 1 SD Strangles with a 30-day holding period was displayed. The graph showed that the 45 DTE cycle outperformed the longer cycles.

Tom asked “What is the number one driver for success? It’s your ability to manage your mechanics and assess your risk or your optimal risk along the way."

For more information on Option Decay see:

Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the important takeaways and the math behind why Decay is maximized around the 45 DTE time frame against the possible Gamma risk you might have.

Options Jive More installments

See All »

Latest tastytrade Videos As of August 03

Most Shared From the last 30 days