You have probably heard it before. Trading options with 45 days to expiration (DTE) is the sweet spot. This is also what I have been doing since I learned that information from Tastytrade.com and Optionalpha.com.
The following slides taken from this Tastytrade.com video further solidifies that claim. The key here is Average P/L per day. The study was done based on exiting at 50% of the max profit (which was not made clear in the video but that’s what they normally do). So, even though the overall profit was higher with the 90.25 DTE trades, when looking at daily P/L basis, 45.75 DTE makes a larger profit.
Sensitivity of Volatility
In addition to these data, another Tastytrade.com video shows that longer DTE options are less sensitive to the changes in volatility. This data also backs up the claim that 45 DTE options are the best ones to trade.
My Trading Plan
However, after testing it out with 45 DTE on a bunch of earnings trades and got burned several times, I started to think what if I extend the timeline of the options? In addition to volatility, what if I also take the advantage of time decay more?
One thing that got me thinking was that, what if I exit the position at 35% max profit rather than 50% like what Tastytrade does. Since the premium I would get is much higher with longer DTE options, exiting at 35% max profit could potentially be somewhat close to 50% max profit of shorter DTE options.
Also, the studies done by Tastytrades are on indexes but Vega could vary widely from stock to stock. So what if I focus on stocks that have high Implied volatility and high Vega?
The reason for this is I am not an active trader so I don’t want to actively adjusting my positions often. With 45 DTE options, the safety margin is much smaller compare to longer DET options, so a relatively small move in the underlying stock could easily cause my 45 DTE position to become a loser. By using the longer DTE options, it not only gives a much wider out of the money range, I could also keep the position open and wait for it to come back without the need of checking on it too often. While I am waiting, the time decay would also be working in my favor. Sound like Win, Win.
As I mentioned in the SPX Iron Condor Strategy post, based on the small scale testing showcased in that post, trading options with 100 days to expiration seems to be the best choice in terms of benefiting from time decay. So, I decided to look for around 100 DTE options where possible.
In case you are not familiar with selling strangles, it is a high volatility options trading strategy and essentially the same as selling an Iron Condor with unlimited risk. It sounds dangerous but in reality, the risk is within an expected range when executed correctly.
Below is the trading progress so far.