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I am not currently an options trader (I trade energy futures) but I have traded quite a lot of options in my past. This is one of several threads at futures.io (formerly BMT) that I subscribe to and read with great interest. I have found it to be very thought provoking, informative and educational.
I have found the recent few days discussions and videos regarding Karen #Supertrader and Craig Stevenson very interesting.
Not the intent of my post - but I think it should be pointed out that if every month you sell an option that has only a 5% chance of expiring in the money then there is a 54% chance at year end you have had 12 consecutive winning months and even a 29% chance of 24 consecutive winning months. Question is what happens when the streak ends.
Anyway back to the point of my post. All the discussion regarding the 'sweet spot' of option decay encouraged me to pull up a spreadsheet and analyze the Theta of different options. While Blueroo posted some interesting charts of CLM4 90P over time a few pages back, I wanted to see how the sweet spot of decay looked, once we exclude market movement. The following chart shows Theta versus Days to Expiry of different out of the money calls, and selected call spreads. Price is held constant at 100, Volatility held constant at 20% (with no skew) and Interest Rates held at 1%. Hence the only thing changing is Days to Expiration. All of this analysis was done with a simple black scholes model programmed in VBA/Excel. This is obviously over simplifying real life markets and may completely nullify the entire analysis.
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Nothing particularly surprising here. With regards to outright calls the further out of the money you go, the further out you sell them the greater the decay. I wonder how significantly this is effected by the lack of skew in the analysis. I suspect the skew increases as we move closer to expiry, effecting the analysis of OTM options the most.
I then rescaled the charts to look at "Theta as a Percentage of Premium" vs Days to Expiration. Unfortunately as we approach expiry the rate of change of price significantly exceeds the rate of change of theta, and the charts go exponential, limiting their use. It was interesting to see how differently the call spreads were in comparison to the first chart though.
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Next I rescaled the first chart, setting Theta with 100 days to expiration to be a base of 100. This enables us to see more clearly whether Theta is increasing or decreasing and to identify the sweet spots of decay easier.
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Again nothing particularly surprising regarding the outright calls, but I did find the shapes of the call spreads to be interesting.
Finally just out of curiosity I decided to scatter plot Theta vs Delta for the last 100 days to expiry. Sorry that the chart has different color scaling than the previous three. Obviously points in the upper left represent 100 DTE and points in the lower right 1 DTE.
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If one believes that delta is indicative of or at least highly correlated to the probability of expiring in the money, somebody who is trying to collect theta regardless of price direction, would probably be interested in selling options with low delta's and high theta's. ie Options as close as possible to the bottom left of the above chart.
What does all this mean? I'm honestly not sure, but since I did the analysis I thought I would at least share it.
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There is a difference between probability over time and conditional probability. Say for the game of black jack when
cards are dealt, the probability of cards that remain changes. The same for selling DOT puts. When risk reaches a level and adjustments are made, the probabilities change.
I don't how if it is of any help, but here is a screenshot that I took of optionvue matrix for CL for Friday 12 pm.
Optionvue presumably includes current volatility skew in their calculations. Looking at Aug options both OTM calls and puts have nice premium, but for the same Prb. ITM (probability in the money) puts have a little more premium and theta.
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I did read the summary on page one before and it actually says:
I am still going though the posts, so may be somewhere along the way the rules have changed. I did not come here for rules though but as a place to connect with people that do similar things.
The deltas on the strikes that I posted originally were covering the range below 3 delta (or 0.03 in your notation). They may differ from other platforms but not by much.
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I do the same thing as Ron. We go further out b/c there is less risk of the option going in the money, and more likely the trade will be profitable. Here's our baseball analogy, we hit singles often, we don't go trying to smack that home run ball and risk striking out. Risk management is key to option selling, we take small winners and avoid that one big loser as much as we possibly can, hence why we go for very low deltas.
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