Chasing Theta

Discussion in 'General Discussion' started by mdb, Jul 10, 2017.

  1. mdb

    mdb Member

    When choosing my best income strategy, I use a simple metric to gage "capital productivity" of a trading account (in addition to other "soup ingredients": gamma, vega, etc.) And that is Theta/Margin ratio.

    I "guesstimate" it in $1/$1000 units, i.e., in 0.1%. When applied to a single position it looks like this:
    1. Road Trip example -- 0.68 units (54 DTE):
    2. FruitFly example -- 3.6 units (31 DTE):
    In these examples, position 2 is 5.3 times more efficient than position 1 (3.6 / 0.68), with everything else being equal.

    It can be applied in any other situation, e.g., Parking Trade, income trade in PM account, etc. In the same manner, one can estimate capital efficiency of a whole account, by dividing total Theta of all the positions by account balance.

    * * * * * * *

    That leads me to the conclusion in "adjustment vs. no-touch" argument. Maintaining "fat" Theta is essential. When Theta is drying up, Matt's FruitFly rules call for a swift re-positioning (after couple of small upside adjustment, though), while RoadTrip butterfly may remain open when the market is far to the right (as in example 1). Or similarly, Rhino can be stuck in a small calendar -- just to have the trade going. All adjustments do is saving on commissions (compared to re-positioning) and passing time so that the position can be booked with a better P/L. Meanwhile, the time is ticking away. With this metric in mind, keeping position going with a low Theta/Margin ratio is a waste of valuable time and capital, IMHO. Saving a few dollars on commissions is not worth it.

    And on top of that, having no-touch rules is so liberating! No need for OV/ONE to track P/L, no need to babysit the position with pre-programmed exit rules in place, ease of automated back-testing, and other advantages. Just keep Theta going and maintain hedges!

    Am I simplifying? What do you think?
  2. cowmoo87

    cowmoo87 Member

    I always looked at Gamma/Theta ratio; for anything where you want fatter theta (reward), you'll be willing sacrifice for higher negative gamma (risk).

    For Position 1, the Gamma is positive which means that I don't really have to worry unless there is a Black-Swan market meltdown; like a long straddle, any normal short term movement up in the market or down in the market will make me money (except I'm gaining theta, not losing theta).

    For Position 2, The Gamma/Theta ratio is okay; not as good as position 1 though.
  3. Chaitanya

    Chaitanya Active Member

    Yes mdb. I think you are missing one very important thing. Having that hump behind where the market is, is a big deal (atleast for me). I trade my own version of a butterfly much closer to ATM, but have been backtesting roadtrips and fruitfly's recently and i am putting on roadtrips in live accounts. The peace of mind is immense. With a fruitfly if you have a down 80-100 point opening it will be hard to manage it. Infact, my own version of ATM has a small short delta built in into each trade - but even with that i feel hard to put on fruitfly's - specially if you want to scale up.

    Best thing i can say is spend a couple of days and backtest both the methods in various market conditions. Thats the best way to get a feeling for how they trade.

    Andrew C and Luke like this.
  4. Jim C

    Jim C Member

    mdb, Unless Matt has recently changed the FruitFly rules, the rules do not call for a repositioning of the trade. Upside adjustments to maintain theta/delta are permitted only as long as planned capital is not exceeded. There are no downside adjustments. Has Matt modified the rules?
  5. mdb

    mdb Member

    I can't argue with that. And I am not saying at all that FruitFly better than Rhino or vise versa. What I am saying is that within your risk parameters wasting Theta does not make sense to me when ATM line moves to the right too much. In other words, watching this ratio helps staying on top of your Theta number.

    Not that I know.

    That happens fairly quickly if the market keeps going up, in contrast to the other strategies mentioned.

    Another strategy that very much appeals to me by its simplicity is Falde's NetZero fly:
  6. Luke

    Luke Well-Known Member

    Have you watched the 60-40-20 round table with Mark Mosley? It's based on that trade (I don't know the differences) and I'm testing it now with both RUT and SPX. Put one of each on live and both have come out winning. I need to keep testing it and I am doing that...
  7. mdb

    mdb Member

    I have traded it live in SPX with a bit modified rules (exit only if upper leg delta moves outside of .4-.8 range and a bit shorter DTE - about 50) - and it indeed performs well.
  8. Andrew C

    Andrew C Well-Known Member

    I think that Chetan's observation about having a large hump (i.e. "profit zone') below the market is very significant. It is similar to one that Jim Riggio has made in the past. Interesting to note that most income trades with a high expectancy are designed this way.
    Last edited: Jul 15, 2017
    Paul Demers likes this.

Share This Page

  1. This site uses cookies to help personalise content, tailor your experience and to keep you logged in if you register.
    By continuing to use this site, you are consenting to our use of cookies.
    Dismiss Notice