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Market Measures

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Collecting Theta

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.

Today, we want to explore that further and see how much P/L, on average, we keep as a percent of our expected daily theta.

A current theta of 9 means that theoretically, all other variables equal, the strangle will get $0.09 cheaper by tomorrow, thus yielding a profit to option sellers of $0.09 x 100 = $9.00.

So, what percent of that $9 do we actually see in our daily P/L historically?

We find that in the first ½ of the trade, on average, we collect 52% of our theta in our daily P/L… but in the second half, we only collect 11%.

This makes the case to manage early as theta no longer becomes a reliable metric in the second half of the trade.

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