Market Measures

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Premium Decay Across Deltas

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.

In previous studies, we’ve demonstrated that when you control for Delta, the actual Theta decay curve is very close to the theoretical Theta decay curve. This piece explores that relationship further by testing the actual theta decay for a variety of Delta puts.

The Study:
  • SPY
  • 45 Days
  • 2005 – Present
  • 5, 10, 16, 30, and 50 Delta Puts
  • Recorded the Non-Movement Occurrences
    • The Stock Price is Less than 0.5% Away from the Original Stock Price at Order Entry.
Results:

When we control for underlying price movement, the actual premium decay curve very closely matches the theoretical premium decay curve; further OTM options decay faster than ATM options, leveling off prior to the expiration date. However, on a nominal basis, at-the-money options collect more premium per day, hence why we manage strangles at 50% and straddles at 25% max profit.

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