Options Theory – Option Cycles – When to enter a trade

I prefer to enter option trades with 45-60 days left until expiration; this is the sweet spot for Theta decay.  I prefer to trade only monthly option cycles at this moment.

For example the current May options have 38 days to expiration; The June options have 66 days until they expire. So for me I’m likely to wait 6 days until my window opens for placing option trades.

I manage trades at 50% of the max potential profit – if they haven’t reached that target I let them work until they either hit 100% loss of the current premium or I give them a second look at around 21 days until expiration. As days go below 21 days I’ll give in and try to take 30-40% of profit – eventually around 10 or so days I’ll take what I can get even a scratch (break even) or small loss.

I recommend you watch this video from Tastytrade that asks – “Is it better to trade 15 days until expiration or 45 days?”

The market measure starts at around 4.5 minutes in..

Here’s a screen shot showing the results of 2 underlyings (AMZN and SPY) and using strangles which should have a 68% chance of success

when should you put on your option trades

As you can see using 45 days to expiration was a lot more successful. In terms of total profit it was almost 3x the profit for AMAZON, and 2,5k in profit versus -892 in the SPY

The biggest loss taken was almost cut in half with duration as well.

Here is another post showing similar results. Here is my google foo about the whole hypothesis.

The idea is very simple –
1) Setup a trade with 70% chance of success
2) Manage the trade at 50% of max profit.
3) Enter the trade with 45-60 days to expiration.

with the above perimeters and having a large number of occurrences. You should experience 80% or even better as a percentage of winning trades.