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.Study
- 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.