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Theta Ratio in a Portfolio

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.

As option sellers, our profits come from the daily decay in option prices. But how much Theta should we have in our account? In this piece the Research Team looks at the historical daily Theta Ratio in an account of SPY strangles both holding to expiration and managing early.

The Study:
  • SPY
  • 1 SD Strangles
  • 2005 – 2018
  • 45 Days to Expiration
  • Held to Expiration
  • Recorded the Daily Theta Ratio (Theta / Asset Value)
  • $1M Account, 25% Capital Allocation
Results:

For a portfolio of short strangles in SPY to outperform long SPY the strangles need to be managed at 21 DTE. This portfolio maintains a median Daily Theta Ratio of around 0.05% the Asset Value.

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