A typical study we run will be a test of astrategy such as a short using the options cycle closest to 45 . Why shouldn't we use the longer dated options to 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)with 110 DTE, 75 DTE and 45 DTE over a 30 day period was displayed. The graphic compared the rate of 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:
Options Jive from July 31, 2015:
Options Jive from March 7, 2016:
Best Practices from April 27, 2016:
Watch this segment of Options Jive withand 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.