Strangling Time Decay Profits from Short-Dated Index Options

Session Title

Gambling Mathematics: Classic Games & Odds

Presentation Type

Paper Presentation

Start Date

28-5-2026 12:00 AM

Abstract

Practitioners claim that time decay represents a persistent soure of profits. Thus, we examine how option writers can systematically capture time decay from short-dated S&P 500 index options while being mindful of delta and gamma risk. At-the-money short-dated call and put options have the hightest speed of time decay. Writing matched at-the-money call and put options forms a short straddle strategy. At initiation, straddles are delta neutral, but this strategy offers a narrow buffer against changes in the underlying price.Writing paired out-of-the-money call and put options forms a short strangle strategy. At initiation, strangles are delta neutral and they provide a wide buffer against underlying price changes. Strangles can still have a zero delta at expiration. We analyze the performance of these option strategies with one week to expiration from 2010 to 2019 using daily S&P 500 Index options data. We include exchange-mandated margins and bid-ask spreads. Traditional risk measures strongly favor the short strangle. The short 5% out-of-the-money strangle strategy produced a statistically significant positive average return of about 0.52% per week. Returns for the riskier short straddle position were insignificantly different from zero. We test these results in a holdout period, January 2020 through February 2021. Here, market returns were highly volatile, especially during the Covid-19 Crash. Weekly returns for the strangle and the straddle are insignificantly negative.

Author Bios

Tom Miller, Jr. received his Ph.D. in finance from the University of Washington and his Bachelor’s and Master’s degrees in economics from Montana State University. His current research includes projects on various aspects of consumer credit and, specifically, small dollar installment loans. Professor Miller also maintains an active research interest in derivative securities, specifically short-dated options. He is a co-author of Fundamentals of Investments: Valuation and Management, 11th ed.

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May 28th, 12:00 AM

Strangling Time Decay Profits from Short-Dated Index Options

Practitioners claim that time decay represents a persistent soure of profits. Thus, we examine how option writers can systematically capture time decay from short-dated S&P 500 index options while being mindful of delta and gamma risk. At-the-money short-dated call and put options have the hightest speed of time decay. Writing matched at-the-money call and put options forms a short straddle strategy. At initiation, straddles are delta neutral, but this strategy offers a narrow buffer against changes in the underlying price.Writing paired out-of-the-money call and put options forms a short strangle strategy. At initiation, strangles are delta neutral and they provide a wide buffer against underlying price changes. Strangles can still have a zero delta at expiration. We analyze the performance of these option strategies with one week to expiration from 2010 to 2019 using daily S&P 500 Index options data. We include exchange-mandated margins and bid-ask spreads. Traditional risk measures strongly favor the short strangle. The short 5% out-of-the-money strangle strategy produced a statistically significant positive average return of about 0.52% per week. Returns for the riskier short straddle position were insignificantly different from zero. We test these results in a holdout period, January 2020 through February 2021. Here, market returns were highly volatile, especially during the Covid-19 Crash. Weekly returns for the strangle and the straddle are insignificantly negative.