Key Concepts

Duration (Time Decay)

Duration is the name of the game at tastytrade. Since our primary strategy is to sell premium, we allow time decay to work in our favor. We generally enter trades that are between 25-50 days to expiration. This range gives us enough time to be right about our assumption and also offers us an acceptable amount of credit. We have found that in periods of low volatility, we can extend duration to increase our credit received. Additionally, we can use the nearest expiration for earnings plays to capitalize on the volatility contraction that ensues afterwards.

When it comes to managing trades, duration is the first variable we look to change. Assuming the market is cyclical and our assumption is still the same, we have found that we can sometimes roll to extend duration until we are right.

We have conducted numerous studies that prove duration trumps direction over time. We define one aspect of our risk through strike selection, but we also define our risk with duration. The shorter the duration, the less time we have to be right and vice versa. This is why we tend to stray away from using expirations that are a few days away with standard positions.

In periods of high volatility, we do not reduce our duration. We allow ourselves enough time to be right in our assumption and add another factor that can generate profit, which is volatility contraction. Our goal at tastytrade is to manage our duration wisely and optimize our profits by correlating our max profit percentage directly to the amount of days held in a position.

Duration (Time Decay) Videos