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Market Measures

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Risk Reward Ratios

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.

This segment of Market Measures compares the theoretical risk/reward ratio to the historical realized risk/reward ratio when managing early.

In order to balance our risk/reward ratio, we like to use management strategies, such as managing early. Yet, when we look at the theta/gamma ratio, this theoretical ratio suggests that holding to expiration is most profitable.

But the results for the historical realized reward/risk ratio suggest that around 20 DTE, the ratio decreases. Therefore, the theta/gamma ratio overstates the reward/risk ratio, and managing early is one way to have a better risk/reward ratio.

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