Options Jive

TROC (tastylive Return on Capital)

| Aug 31, 2016
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    Options Jive

    TROC (tastylive Return on Capital)

    Aug 31, 2016

    There are many important parts to the tastylive way of trading but at the heart of it is selling premium to take advantage of Theta (time decay). Theta decay is the theoretical decrease in price that options will experience each day, and it changes over time. It also changes for different strategies used as was demonstrated in a graph of Theta decay for a short Straddle, short Strangle and a short out-of-the-money (OTM) put. Depending upon your Theta exposure you can approximate your Return on Capital (ROC) by using TROC , aka the tastylive ROC.

    Theoretically, option sellers can earn their portfolio’s Theta value daily. Generally, our target area is a portfolio Theta between 0.1% and 0.5% of net liquidity per day. When IV is lower out Theta percentage should also be lower. We can annualize this figure and arrive at the TROC % by multiplying Theta by 365 (calendar days) and dividing by net liquidity. A table displayed the daily Theta as a percentage of net liquidity and the resulting TROC for various levels. The figures for TROC showed very large returns.

    Tom posed a question to Tony, “If I am collecting 36.5 % of Theta per day, how much of that is a reasonable expectation to keep?” Our experience tells us this is not realistic and we should expect just a fraction of TROC because many variables play into realized profit, not just Theta. A heuristic analysis tells us to expect to keep around 25% of theta (TROC). A table of the estimated return from TROC using the 25% of TROC estimate was displayed. The table gave an estimation of the amount of TROC one may expect to keep based on daily theta. The 25% figure will vary depending upon strategies used and from year to year but it does provide some reasonable expectations. Make sure you see the Market Measures segment next week in which we will backtest this.

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

    Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and a “great piece of resesarch” on the concept of TROC which projects Theta percentages to annualized 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.

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