As tastytraders, we like to sell premium 45 days to expiration and manage our trades 21 days to expiration. The reason is to maximize our theta while minimizing risk.
Let's explore the unique relationship between theta and implied volatility to see if we can maximize theta using IV.
When looking at theta values of 16 delta strangles over time, there is no real relationship with IV, however, in order to look at theta correctly, we have to normalize by either capital used or the stock price.
When we do that, we see a clear correlation between theta and IV. As IV increases, so does your theta as percent of capital used.
This implies that to maximize theta in our portfolio, sell in periods of high implied volatility.
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