Research Specials LIVE

Volatility and Duration

Research Specials LIVE

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

One of the core management strategies for short premium trades is to sell at 45 DTE and manage at 21 days. This greatly reduces portfolio volatility thus providing a more consistent return. What happens if we keep the duration constant but trade the latter half of the expiration cycle?

The Study:
  • SPY
  • 2005 - 2018
  • 16 Delta Strangles
  • Compared two Strategies:
    • Selling 21 DTE, Holding to Expiration
    • Selling 45 DTE, Managing at 21 DTE
  • Both Strategies have the Same Duration

The reason behind managing short premium trades at 21 days is to reduce the volatility. Although in theory we collect more Theta the closer we get to expiration, we assume greater risk. When we trade the back portion of the expiration cycle, we see lower average P/L. Trading at 45 DTE and managing at 21 days tends to provide the best balance between profits and volatility.

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