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Actual Premium Decay

Market Measures

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

Direction and size are two of the largest risks of trading options. In this study, the Research Team compares actual and theoretical theta decay when completely controlling for directional risk.

The Study:
  • SPY
  • 45 Days
  • 2005 – Present
  • Sold ATM Puts (50 delta)
  • Recorded the Non-Movement Occurrences:
    • Stock Price at Day t is Within 0.5% of the Stock Price at Day t=0.

When we isolate occurrences where the stock price is within 0.5% of the original stock price at trade entry, we can see how closely the theoretical theta curve matches a trade’s actual theta decay. If we control for delta risk, a short premium option trade comes entirely from premium decay.

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