Option traders use the Greeks to evaluate their portfolio, two of the most important being Delta and Theta which can be proxies for risk and return. If we take those values, we can determine our Delta / Theta ratio which is how much directional risk we are taking for each point in potential theta return.The Study:
- 1 Standard Deviation Strangles
- Closest to 45 Days to Expiration
- Held to Expiration
- 2005 – Present
- Recorded Daily Delta / Theta Ratio for All Occurrences
Looking at all occurrences, we see that for the majority of one standard deviation strangles the Delta / Theta ratio is between -10 and +5. Looking further we can see most occurrences lie between -5 and +3. If we’re trying to stay Delta neutral and our Delta / Theta ratio expands beyond +-5 we may need some adjustments.