Theta Harvester

Sustainable theta harvesting targets 0.1-0.2% of account per day in theta (roughly 2-4% per month, 25-50% per year before losses). However, occasional losses can be 2-5x average wins. Net annual returns of 8-15% on margin are realistic for experienced harvesters after accounting for losses.

For naked options, brokers typically require A$25,000+ for margin. For defined-risk strategies (spreads, iron condors), you can start with A$5,000-10,000. However, A$25,000+ allows better diversification and position sizing. Don't start with less than you can afford to lose 30-50% of.

Close early (at 50% profit or by 14 DTE). While letting options expire saves commissions, the risk of last-minute moves increases significantly near expiration. The gamma risk in the final week isn't worth the remaining premium. Take profits and move to the next trade.

If assigned, you now own 100 shares at the strike price. Your effective cost is strike minus premium received. This is fine if you chose strikes on stocks you'd want to own. If you don't want the stock, you can sell immediately or sell covered calls against it (Wheel strategy).

Earnings can cause large, unpredictable moves that breach your short strikes. While premium is elevated before earnings, the actual move often exceeds what was priced in. Theta harvesting profits from time passing quietly - earnings are the opposite of quiet.

Iron condors have defined risk (you know max loss) but lower premium. Short strangles have undefined risk but higher premium and no cap on losses. Use iron condors when starting out, during uncertain periods, or when you can't monitor closely. Use strangles only with experience and ability to manage.

Roll if: You can collect additional credit, the fundamental thesis still holds, and the underlying hasn't broken key levels. Close if: You can only roll for a debit, the underlying has fundamentally changed, or the position has reached your stop loss. Never roll to avoid taking a loss - that's denial, not strategy.

Generally 4-8 positions for diversification without over-complexity. More than 10 becomes hard to manage effectively. Ensure positions are spread across sectors (not 5 bank trades). Total portfolio theta should be 0.1-0.2% of account daily, and total risk should be < 20% of account.

16-delta is the classic 'one standard deviation' target, balancing premium with safety. 30-delta provides more premium but closer to ATM (more risk). 10-delta is safer but minimal premium. Most systematic approaches use 16-delta as the sweet spot. Adjust wider (lower delta) around uncertain periods.

1) Don't panic - the worst decisions are made in fear. 2) Close positions that are near or past stop loss - don't hope for recovery. 3) Avoid adding new short positions until volatility stabilizes. 4) If you have tail hedges, they should be helping offset losses. 5) Post-crisis, elevated IV creates excellent harvesting opportunities - be ready to deploy.

Use risk-based sizing: Max position size = (Account × Max Risk %) / Position Max Loss. For theta strategies, max loss on any single trade should be 2-5% of account. Portfolio-wide, total at-risk capital across all positions should be < 20%. Additionally, total daily theta should be 0.1-0.2% of account to ensure survivable drawdown during crises.

Allocate 10-20% of gross premium income to tail hedges. The hedge should offset 30-50% of expected crisis loss. Calculate your portfolio's vega and buy enough long vega (OTM puts, XVI calls) to offset half. Accept that hedges reduce returns but enable survival. Test hedge effectiveness against 2008, 2020 scenarios.

Watch for: 1) XVI term structure inverting (backwardation), 2) XVI rising rapidly (not just high), 3) Put skew steepening, 4) Credit spreads widening, 5) Cross-asset correlations increasing, 6) Overnight gaps increasing. Any 2-3 of these suggest regime shift. Reduce positions, widen strikes, increase hedges.

Low vol (XVI < 12): Tighter strikes (25-30 delta) for adequate premium, accept lower returns. Normal vol (XII 12-18): Standard 16-delta approach. Elevated vol (XVI 18-25): Premium-rich, use 12-14 delta, post-crisis is ideal. High vol (XVI > 25): Very wide strikes (8-10 delta) or pause until vol stabilizes. Always size smaller in high vol.

Realistic Sharpe ratio for systematic theta harvesting is 0.5-0.8. Higher Sharpes (1.0+) are achievable but often involve strategies that haven't been tested through a true crisis. The VRP provides edge, but tail risk creates volatility in returns. Don't believe backtest Sharpes that exclude 2008, 2020, etc.