Market Measures

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Decay Comparison | 30-Day Holding Periods

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.

We believe in selling option premium with about 45 days to expiration (DTE) based on our studies. Those studies did not have consistent time frames for how long the position was held because of the different expirations. Assuming the trades were held the same amount of time, would it be better to sell longer-term options and be able to sell strikes farther away from the stock price for more premium?

A study was conducted in the SPY (S&P 500 ETF) from 2005 to present. On the first day of each month we sold a one Standard Deviation (SD) Strangle in three separate expiration cycles, those closest to 45 DTE, 75 DTE and 110 DTE. All positions were closed 30 calendar days after entry to compare the rate of decay of the options. Tom and Tony mentioned that they knew that the 45 day option would decay the fastest but wondered how the P/L would be.

A table of the results of the short SPY 1 SD Strangles was displayed. The table included the average P/L per trade, average P/L per day, percentage of profitable trades and largest loss. An 11 year graph of the running P/L of the 1 SD Strangles in 30-day holding periods was also shown. The results made clear which expiration cycle is the best.

For more on some of the concepts discussed here see:

Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the important takeaways and the study results comparing short 1 SD Strangles across various expirations but controlled for the length of the trade.

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