Market Measures

How Much Theta is Captured?

| Sep 7, 2016
Up Next
    Market Measures

    How Much Theta is Captured?

    Sep 7, 2016

    The Option Jive segment on August 31, 2016, "TROC (tastylive Return on Capital)" introduced TROC, the tastylive Return on Capital (ROC). The segment explains how when selling premium to capture Theta (time decay) we can predict a rate of return based upon our Theta exposure as a percentage of our net liquidity. Since there are numerous other factors in trading besides Theta we said to expect to capture about 25% of Theta collection which we call our Theta ratio (so we predict that a 60% TROC number will yield a 15% actual return). That was based upon our observations. We promised a study to back up that 25% number. Is that number accurate? How do we create some kind of predictable return based on ROC?

    Our study was conducted in the SPY (S&P 500), IWM (Russell 2000) and TLT (20 year Treasury Bonds), three of the largest ETFs. We used data from 2005 to the present. We sold the 1 Standard Deviation (SD) Strangles using the expiration cycle closest to 45 days to expiration (DTE). We found the P/L as a percent of Theta collection (the Theta ratio) for each year and summarized the results.

    The results were displayed in a table and a bar graph. The table listed the average, minimum and maximum Theta ratio percentage for each of the SPY, IWM and TLT. The range of the averages was 34% to 14% and the average of all 3 ETFs was 25%. The bar graph used different colors for each ETF and broke down the Theta ratios by year. The varying results are yet another good argument for diversification. A final table reminded viewers about what our 25% rule regarding TROC means for returns.

    For more information on Return On Capital (ROC) see:

    Watch this segment of Market Measures with Tom Sosnoff and Tony Battista for the valuable takeaways and the results of our study on the percentage of Theta collection one should reasonably expect to capture and how to combine this with the TROC, tastylive Return on Capital to estimate returns.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

    More like this

    tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer.  Options, futures, and futures options are not suitable for all investors.  Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on

    tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.

    tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.

    tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.

    © copyright 2013 - 2024 tastylive, Inc. All Rights Reserved.  Applicable portions of the Terms of Use on apply.  Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.