Direction and size are two of the largest risks of trading options. In this study the Research Team compares actual and theoreticaldecay when completely controlling for directional risk.The Study:
- 45 Days
- 2005 – Present
- Sold ATM Puts (50 )
- 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.