Theta Harvester

Covered calls involve owning stock and selling calls against it - you're exposed to stock direction. Theta harvesting typically uses defined-risk structures like iron condors that are delta neutral, profiting primarily from time decay rather than stock direction.

Returns vary widely based on structure, sizing, and market conditions. A well-managed theta portfolio might target 1-2% monthly return on capital, but this isn't guaranteed. Expect high win rates (70-80%) with occasional larger losses.

Holding to expiration exposes you to gamma risk - small stock moves cause big P&L swings near expiry. Taking 50% profit early reduces time at risk, frees capital, and studies show it improves risk-adjusted returns.

Yes, but position sizing is challenging. Iron condors on lower-priced stocks or XIU can work with smaller accounts. Minimum practical account size is around $10,000-$15,000 CAD for meaningful diversification.

During crashes, all short premium positions tend to lose money together. IV spikes (hurting short vega), stocks move past strikes (gamma losses), and correlations increase. This is why sizing and tail hedging are critical.

Most retail traders should use defined risk (iron condors) for several reasons: known max loss, TFSA/RRSP eligible, simpler margin, and easier risk management. Undefined risk (strangles) can be used in margin accounts by experienced traders.

For diversification, aim for 5-10 positions across different underlyings and expirations. This spreads risk and smooths income. Too few = concentrated risk; too many = harder to manage and higher commissions.

Consider closing if: loss exceeds stop loss, thesis has changed, or stock has made a fundamental move. Consider adjusting if: stock movement is temporary, you can roll for credit, and original thesis intact. Limit adjustments to 2-3 per position.

Generally, don't hold theta positions through earnings - the gap risk is high. Either exit before earnings, choose underlyings without earnings during your holding period, or accept the risk with smaller sizing.

Look for: liquid options (tight bid-ask), moderate volatility (not too low for premium, not too high for risk), and stocks you understand. In Canada, the big banks (RY, TD, BMO), XIU, and ENB are popular choices.

Calculate Theta / Max Loss for each potential trade. Compare structures and strikes. Iron butterflies have higher theta but more gamma. Calendars can have positive theta with less gamma. Optimize based on your risk tolerance and view.

Track aggregate theta, delta, gamma, and vega daily. Target: high positive theta, near-zero delta, manageable negative gamma, acceptable negative vega. Adjust positions to maintain targets. Stress test: what if IV spikes 20%?

Depends on risk tolerance. Conservative: 15-20%. Moderate: 25-35%. Aggressive: 40-50%. Higher allocation increases income but also drawdown risk during tail events. Maintain cash reserves regardless.

You need historical option prices (expensive) or simulate using Greeks and underlying prices. Test entry/exit rules on historical data. Track CAGR, Sharpe, max drawdown, win rate. Validate on out-of-sample data. Include transaction costs and slippage.

Bull markets: Low IV means less premium, but calm markets = easier wins. Bear/volatile markets: High IV means more premium but higher risk. Crashes: Theta strategies suffer. Consider regime-aware sizing - smaller positions in uncertain periods.