C Short Put 45 DTE Cash-Secured Options Backtest

4 min read

In this post we’ll take a look at the backtest results of opening one C short put 45 DTE cash-secured position each trading day from Jan 3 2007 through August 30 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold C.

There are 10 backtests in this study evaluating over 27,500 C short put 45 DTE cash-secured trades.

Let’s dive in!

Methodology

Core Strategy

• Symbol C
• Strategy Short Put
• Start Date 2007-01-03
• End Date 2019-08-30
• Positions opened 1
• Entry Days every trading day in which entry criteria is satisfied
• Timing 3:46pm ET
• Strike Selection
  • 5 delta +/- 4.5 delta, closest to 5
  • 10 delta +/- 5 delta, closest to 10
  • 16 delta +/- 6 delta, closest to 16
  • 30 delta +/- 8 delta, closest to 30
  • 50 delta +/- 8 delta, closest to 50
• Trade Entry
  • 5D short put
  • 10D short put
  • 16D short put
  • 30D short put
  • 50D short put
• Trade Exit
  • 50% max profit or 21 DTE, whichever occurs first
  • Hold till expiration

Assumptions

• Margin requirements are always satisfied
• Margin calls never occur
• Margin requirement for short CALL and PUT positions is 20% of notional
• Margin requirement for short STRADDLE and STRANGLE positions is 20% of the larger strike
• Margin requirement for short VERTICAL SPREAD positions is the difference between the strikes
• Early assignment never occurs

Mechanics

• Prices are in USD
• Prices are nominal (not adjusted for inflation)
• Margin collateral is held as cash and earns no interest
• Assignment P/L is calculated by closing the ITM position at 3:46pm ET the day of expiration / position exit
• Commission to open, close early, or expire ITM is 1.00 USD per contract
• Commission to expire worthless is 0.00 USD per contract
• Commission to open or close non-option positions, if applicable, is 0.00 USD
• Slippage is calculated according to the slippage table
• For comprehensive details, visit the methodology page

Scope

This study seeks to measure the performance of opening option positions and will interpret the results from the lens of income generation relative to buy-and-hold.

The utility or effectiveness of options as a hedging tool or other use will not be discussed and is out of scope.

Results

Win Rate

Managing trades early lowered the win rate for all strategies.

The riskier the trade the lower the win rate.

Annual Volatility

Worst Monthly Return

Average P/L Per Day

Average Trade Duration

Managing trades at 50% max profit or 21 DTE yielded trade durations less than half the duration of hold-till-expiration.

Compound Annual Growth Rate

Sharpe Ratio

Profit Spent on Commission

None of the strategies generated a profit. Thus, even a commission-free trading environment would yield losses.

Total P/L

Holding till expiration yielded better performance than managing early.

Overall

Neither the option strategies nor buy-and-hold was profitable.

Discussion

This study was interesting in that it highlights a nuance in the average daily returns methodology: trading activity continues despite the portfolio value dipping below zero. This is by design and can be added to the list of other limitations associated with theoretical / backtesting research. The benefits of using this methodology allow us to 1) capture performance stats other than total P/L over the duration of the backtest and 2) answer the question of whether keeping a strategy alive would have allowed it to recover.

As we saw in the results section, the 30D and 50D early-management strategies never brought the portfolio back to a $0 balance. Not as clearly despited are the 30D and 50D hold-till-expiration strategies. These “blew up” and caused the portfolio to go negative at least once over the span of the backtest.

The outcome of investing with Citi was similar, albeit more severe in a negative sense, than investing with USO. None of the strategies were profitable but short put option strategies tended to outperform in that they lost less money and had an improved Sharpe ratio than a buy-and-hold approach.

Summary

Systematically opening cash-secured short put positions on C was unprofitable for all option strategies.

All of the cash-secured C hold-till-expiration short put strategies outperformed buy-and-hold C on a risk-adjusted return basis.

The 10D and 16D hold-till-expiration strategies tied for having the greatest risk-adjusted return.

Thanks for reading 🙂

Additional Resources

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