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IV and Theta/Vega Ratio

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.

What happens if traders use the Theta-Vega ratio as a trade metric upon order entry?

tastytrade's Research Department ran a study to determine the results.

  • Comparing trade metrics when theta / vega ratio is:
    • T/V is less than 20
    • T/V is between 20 and 30
    • T/V is greater than 30
  • SPY 2005 to Present
  • 45 DTE

Ultimately, our team found that a higher theta/vega ratio yields a larger PnL over time, but since it is highly correlated with IV and IV Rank, we are better off just using IVR in order to avoid calculating another metric.

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