Managing Winners, Managing Early And Managing Based On Theta

Managing Winners & Managing At 21 DTE

“Managing winners” is a concept laid out by tastytrade, whereby one closes his/her position when 50% of the initial credit received is reached. However, it remains a subjective method to rebalancing your portfolio as reaching 10% of your profit potential in one day may force you to take your profits of the table. So, it’s far from prescriptive as it depends on what kind of positions you have on, what IVR environment were in… I’m a big believer in looking at IVR and portfolio theta to figure out when to take profits in positions that have the highest P/L %. To me, it’s about dissecting the whole picture because as long as you have attractive time decay in an underlying but declining IVR, why would you take it off as boosting your daily theta isn’t necessary? The better you understand high IVR, the wider your profit zone will be and the more profit you will generate. In that regard, selling short strangles isn’t about rolling the dice, it’s about trading consistently and letting time work for you.

Tastytrade’s research team conducted the following study utilizing 25% of your capital (in all IVR environments):

The results show us that if you put on trades for 25% of your capital, holding to expiration doesn’t make sense at all. The results are even worse if you take on more risk. The opposite is true for managing early at 21 DTE regardless of how your portfolio is doing. In other words, holding to expiration yielded the same P/L, but saw larger losses while keeping your positions 45 days open. Less reward for more risk. A lot of that has to do with gamma risk, which will be highlighted in my next newsletter. You can sign up for a free sample HERE.


The following study combined “Managing Early” and “Managing @ 50%” whichever comes first. This is precisely what we do based on our daily theta numbers (and we actually have a higher win rate as we’re selling 10 delta strangles instead of 16 delta ones and capture more profits because of high IVR): looking at the positions that should be taken off if they contribute little to our daily theta.

At 21 DTE, you’ve reached the inflection point where your daily P/L starts to become unpredictable. Why do that to yourself? With the Greeks turning against you, just take off your position & rebalance your theta and gamma by rolling out in time.

Why would you wait for a worse risk/reward situation? Managing your theta puts you in a very comfortable situation in which you can consistently generate time value while reducing gamma and delta risk. Ideally, the lower your net deltas and gamma the higher your risk/reward is going to be. The only predictable factor is theta. Heading into the last three weeks before expiration, either your gamma or theta will have changed drastically compared to 45 DTE when you put the trades on. That's when you need to take action!

Below you can see our daily theta numbers (as well as the box plot; a frequency table will be added once we've gathered more data) which is part of the database we share with premium members (along with technical analysis, sector analysis, portfolio analysis and interesting research pieces) . Gaining insight into these parameters is essentially what will set you apart from the rest. It boils down to controlling your trades (which you don't have with simple buy and hold investing or dividend investing as you don't have a high probability of profit when markets go nowhere) in order to maintain high win rates and post predictable returns. In our case, when daily theta drops below €600, we need to take action in order to continue to meet our monthly option income target. As a result, we automatically rebalance our portfolio and its average Days-To-Expiration based on the positions that have the lowest amount of positive daily theta, the highest unrealized P/L % and relatively low IVR.

Capital Invested/Net Cash Position is a very powerful metric that is based on empirical evidence: the higher the IVR when you sell premium, the higher your P/Ls will be and thus the more capital you can allocate to short strangles because of mean-reverting volatility. It's interesting to see the impact of a changing VIX (the fear index) on your margin requirements. The better you can digest these fluctuations, the more mechanical your approach is. Understanding IVR and when to put on certain trades is the foundation for incremental option selling success.

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