The term days to expiration (DTE) refers to the number of days until an option expires. You may also hear us refer to this as “duration” at tastytrade. Standard expiration cycles cease trading after the market closes on the third Friday of each month, but many underlyings have weekly options that expire every Friday. Some underlyings even have non-standard expirations, such as Wednesday after the close or Friday morning. It is important to know when our option will expire to avoid unwanted assignments.
At tastytrade, we like to target 25-50 DTE when opening positions, with 45 days being our sweet spot. This window allows us to maximize the theta decay in our position while also allowing ourselves enough time to be right about our assumption.
We recently uncovered a study that allows us to look at DTE through a different lens. We compared the relationship between DTE and max profit, and found that if we exceed our expected profit for a specific timeframe, we should manage the trade and reallocate our capital. Doing this repeatedly puts us ahead of the curve in terms of theta decay, and speeds up our rate of return over time.
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