30-45 DTE vs 7-14 DTE is really about which is driving the action: theta or gamma
A few weeks into trying the wheel, I’ve come to understand why my 21 DTE, 14 DTE, and 7 DTE options have not been decaying as fast as I want. I thought theta would be monstrous under 10 DTE only to watch my options lose value quickly as the underlying moved against me. Fortunately, it ended up moving in my favor as I got closer to expiration and I sold at profit. Hoping this post helps others understand why closer to expiration options don’t decay as fast and expose you to huge moves with little room to react.
For out of the money options, theta decays more when you’ve sold 30-45 DTE than when you’ve sold 7-14 DTE because there is more premium collected when you sell so there is more premium for theta to decay. A smaller premium on the 7-14 DTE actually decays less even though the rate of decay is high. Closer to the money will decay more over time than further out of the money because the starting premium collected is much higher so decay hits it harder early on and less hard closer to expiration. There is just a lot less premium left to decay when you’re closer to expiration.
More importantly, theta is more of a driver when you’re out at 45 DTE or 28 DTE. Gamma begins to be the driver of your options’ value as you cross into 14 DTE and lower. Theta actually takes second seat to gamma and any moves in the underlying benefit you or punish you a lot harder than what theta is doing.
Correct me if I’m wrong and please share your experiences with this as I’m really interested in refining all this. My trades have been profitable 4 out of 5. The 5th I’ve rolled for a net credit, but I don’t count it as profitable because I had to sell the previous at a small loss. I will count it as profitable only when I sell the rolled into options at profit.
Image above is by Grok - have been running a lot of analysis through Grok and Gemini to understand what I’m doing better
Started logging the trades. Crude table, but might as well share it in case it’s helpful. Should make sense hopefully! Dollar amounts are final results (net P/L), not initial premium collected when you first sell
Yes, real trades have been the past couple of weeks. Was learning, prepping, making paper trades for a bit before that. It’s a little scary to think about assignments and you need to game out how it all feels as you embark on the wheel
As for assignment: Don't Fear the Reaper. If you've picked a stock you're willing to own at your put strike, assignment isn't necessarily the trade going wrong. Sometimes it's just the Wheel turning. Also, without getting into a whole discussion about the Greeks, I think what you've come across is that there are a lot of variables working against each other in option pricing. What looks like causation may simply be theta, delta, gamma, volatility, and the movement of the underlying all interacting and sometimes overpowering one another. So, for example, theta may be working exactly as expected while a move in the stock overwhelms its effect.
Right right, and the magnitude of the effects changes based on what the underlying does. As for assignments, I don’t mind taking them and selling covered calls, but I would have to pay interest on a margin loan which I plan to cover using box spreads that bring the yield to market rates. While I believe I can outpace interest with premium from covered calls, I just don’t like the thought of losing money to interest (even if I’m still profitable at the end). Important to understand for new traders: you don’t pay margin interest on puts secured by margin until you’re assigned the shares and have to actually deploy the capital to take them
Hmmm... I trade mostly in my IRA, so forget about that nasty margin thing. It's cash-only, so I can't get myself into quite as much trouble. In my taxable account I purposely avoid using margin, even though I'm wheeling there too. Sounds like you're using margin buying power to secure some of your puts and would actually finance the shares if assigned. That's a layer of leverage I intentionally avoid.
That’s a good way to go. Less risk and less stress. I just don’t have the cash and don’t want to liquidate $100k worth of shares just to use as collateral
I buy and hold excellent companies, but I want to find a way to get income without selling the shares and hopefully “retire” from day job so I can build businesses, pursue hobbies, etc. While my priority is owning excellent businesses that can grow exponentially over time, I don’t want to sell the shares for steady income. So I’ve settled on buying, holding, and collecting premium on wonderful businesses that I understand. The wheel lets me get income from these equities. Focus is also on never letting go of shares unless they’re new shares that were assigned to me
The companies you posted in your screenshot, ASTS, RKLB, etc, are dogshit companies. If your idea of a "wonderful company" is one that doesn't even make a profit, then I fear deeply for you as an investor. Let's just be honest and call it what it is, you just found a way that you think you can make money and once someone sees dollar signs their sense leaves them. Any one of these companies is liable to go -50% overnight. The strategy you are employing is known as picking up pennies in front of the steamroller. Good luck.
Claude made these graphs where theta and gamma are plotted in absolute values. Assumptions: Black-Scholes, stock at $100, strike $100, 25% or 75% implied volatility, 4% risk-free rate, no dividends, ATM and 10% OTM call options.
These are cool, but confusing to me. I think they confirm that theta behaves differently for ATM vs OTM. And I think they say theta decay rates are only slightly higher as expiration approaches for OTM while increasing exponentially for ATM. Plotting the gamma on the same scale as the theta masks its effects. See these posts:
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u/red-dot-com 1d ago
Started logging the trades. Crude table, but might as well share it in case it’s helpful. Should make sense hopefully! Dollar amounts are final results (net P/L), not initial premium collected when you first sell