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Market Measures

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Gamma vs. 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.

Gamma and theta represent the theoretical numbers for risk and reward. But when looking at them over the course of a 16 delta strangle trade, both of them increase in the second half of the expiration cycle. This means that one could make the argument to sell premium in both the first half and second half of the trade.

However, when looking at historical P/L and risk metrics, they tell a different story.

  • SPY, 16 delta strangles, 45 DTE, 2005-present
  • Recorded avg theta, avg gamma, avg P/L, avg risk

We find that when looking at actual P/L and risk of a trade, it is very clear that selling options in the second half leads to worse risk reward and does not capture the increased theta.

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