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Market Measures

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Theta to Vega Ratio

Market Measures

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The relationship of Time and Volatility tells us how much we are getting paid (theta) for the amount of risk we are taking on (vega). Tune in to hear Tom and Tony discuss the Theta to Vega ratio in today’s Market Measure!

Looking at the ratio of Theta to Vega allows us to see how much risk we are taking on compared to the potential reward. Ideally, we would see a large amount of theta for a smaller amount of vega. The larger the number, the better. The ratio is calculated by dividing theta by vega and then multiplying by 100.

Historically, the Theta to Vega ratio has hovered between 10 and 40. How does this ratio affect our trading? Will we see more successful results by initiating trades when this ratio is high versus when it is low?

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

Tune in to see Tom and Tony discuss results and impact of the Theta to Vega ratio!

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