SPY Short Vertical Put Spread 45 DTE @ 2.5x Max Leverage

4 min read

From time to time clients authorize publication of their thesis, trade mechanics and backtest results. This is one such publication. I received compensation to perform this backtest but no discounts or “perks” were offered in return for authorization to publish.

In this post we’ll take a look at the backtest results of opening one SPY short vertical put spread 45 DTE 15D/10D each Monday and exiting the following Friday, skipping weekend exposure, and exiting early when max profit = 30% or position experiences a 2x loss. Backtest duration is from Jan 3 2007 through Dec 4 2020.

There is 1 backtest in this study evaluating over 900 SPY short vertical put spread 45 DTE 15D/10D trades.

Let’s dive in!

Prior Research

AAPL – Apple Inc.

• AAPL Short Put 0 DTE Cash-Secured
• AAPL Short Put 45 DTE Cash-Secured
• AAPL Short Put 45 DTE Leveraged
• AAPL Long Day Trade

AMZN – Amazon.com, Inc.

• AMZN Short Put 45 DTE Cash-Secured

BTC – Bitcoin

• BTC Long Day Trade

C – Citigroup Inc.

• C Short Put 45 DTE Cash-Secured

DIA – SPDR Dow Jones Industrial Average

• DIA Short Put 7 DTE Cash-Secured (coming soon)
• DIA Short Put 7 DTE Leveraged (coming soon)
• DIA Short Put 45 DTE Cash-Secured (coming soon)
• DIA Short Put 45 DTE Leveraged (coming soon)

DIS – Walt Disney Co

• DIS Short Put 0 DTE Cash-Secured
• DIS Short Put 45 DTE Cash-Secured

EEM – MSCI Emerging Markets Index

• EEM Short Put 45 DTE Cash-Secured
• EEM Short Put 45 DTE Leveraged

GE – General Electric Company

• GE Short Put 45 DTE Cash-Secured

GLD – SPDR Gold Trust

• GLD Short Put 45 DTE Cash-Secured
• GLD Short Put 45 DTE Leveraged

IWM – Russel 2000 Index

• IWM Short Put 7 DTE Cash-Secured
• IWM Short Put 7 DTE Leveraged
• IWM Short Put 45 DTE Cash-Secured
• IWM Short Put 45 DTE Leveraged
• IWM Long Day Trade

MU – Micron Technology, Inc.

• MU Short Put 45 DTE Cash-Secured

QQQ – Nasdaq 100 Index

• QQQ Short Put 7 DTE Cash-Secured
• QQQ Short Put 7 DTE Leveraged
• QQQ Short Put 45 DTE Cash-Secured
• QQQ Short Put 45 DTE Leveraged

SLV – iShares Silver Trust

• SLV Short Put 45 DTE Cash-Secured
• SLV Short Put 45 DTE Leveraged (coming soon)

SPY – S&P 500 Index

• SPY Long Put 45 DTE Optimal Hedging
• SPY Long Call 45 DTE
• SPY Long Call 730 DTE LEAPS
• SPY Short Put 0 DTE Cash-Secured
• SPY Short Put 0 DTE Leveraged
• SPY Short Put 0, 7, 45 DTE Leveraged Comparison
• SPY Short Put 2-3 DTE M,W,F “BigERN Strategy” (guest post)
• SPY Short Put 7 DTE Cash-Secured (coming soon)
• SPY Short Put 7 DTE Leveraged
• SPY Short Put 45 DTE Cash-Secured
• SPY Short Put 45 DTE Leveraged
• SPY Short Put 45 DTE Leveraged binned by IVR (coming soon)
• SPY Short Vertical Put Spread 0 DTE (coming soon)
• SPY Short Vertical Put Spread 45 DTE
• SPY Short Call 0 DTE Cash-Secured
• SPY Short Call 0 DTE Leveraged
• SPY Short Call 45 DTE Cash-Secured
• SPY Short Call 45 DTE Leveraged
• SPY Short Straddle 45 DTE
• SPY Short Strangle 45 DTE
• SPY Short Iron Condor 45 DTE
• SPY Wheel 45DTE
• Making Money in Your Sleep: A Look at Overnight Returns
• A Bad Case of the Fridays: A Look at Daily Market Returns

T – AT&T Inc.

• T Short Put 45 DTE Cash-Secured
• T Short Put 45 DTE Leveraged

TLT – Barclays 20+ Yr Treasury Bond

• TLT Short Put 45 DTE Cash-Secured
• TLT Short Put 45 DTE Leveraged

TSLA – Tesla, Inc.

• TSLA Short Put 45 DTE Cash-Secured

USO – United States Oil Fund

• USO Short Put 45 DTE Cash-Secured
• USO Short Put 45 DTE Leveraged
• USO Short Call 45 DTE Cash-Secured

VXX – S&P 500 VIX Short-Term Futures

• VXX Short Call 45 DTE Cash-Secured
• VXX Short Call 45 DTE Leveraged
• VXX Short Vertical Call Spread 45 DTE

VZ – Verizon Communications Inc.

• VZ Short Put 45 DTE Cash-Secured
• VZ Short Put 45 DTE Leveraged

Other

• Cumulative Income: Investing in Preferred Shares

Backtest Configuration

Strategy Details

• Symbol: SPY
• Strategy: Short Vertical Put Spread (credit spread)
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2020-12-04
• Positions opened per trade: 1
• Entry Days: roll
• Entry Signal: every Monday; if Monday is a non-trading day, the following trading day. If position exits before Friday, open a new position the following day
• Timing 3:46pm ET
• Strike Short Leg: 15D +/- 6, closest to 15
• Strike Long Leg: 10D +/- 5, closest to 10
• Exit Logic: whichever occurs first
  • Exit Profit Target: 30% max profit
  • Exit DTE: N/A
  • Exit Hold Days: N/A
  • Exit Stop Loss: 2x
  • Exit Signal: day of week = Friday
• Max Margin Utilization Target (short option strats only): 50% | 2.5x leverage
• Max Drawdown Target: 99% | account value shall not go negative

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

Methodology

• Prices are in USD
• Prices are nominal (not adjusted for inflation)
• Margin collateral is invested in 3mo US treasuries and earns interest daily
• 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
• Starting capital for short option backtests is adjusted in $100 increments such that max margin utilization is between 90-100%, closest to 100%, of max margin utilization target.
• Starting capital for long option backtests is adjusted in $100 increments such that max drawdown is between 90-100%, closest to 100%, of max drawdown target.

Results

Starting Capital and Leverage

The client requested a max margin utilization target of 50%, also known as 2.5x leverage. It was identified that 5,400 USD was required to achieve the leverage requirement.

We can see by looking at the “max concurrent positions / lots” stat, the option data had some “dirt.” The strategy seeks a single position to be opened on Monday (or the next trading day) and should not have concurrent positions.

Whether the source data has issues and should be cleaned or left “organic” is a judgement call of the client that’s defined in the methodology and scope of work. Argument for cleaning: seeking theoretical results or glaring issue is present. Argument for leaving as is: seeking empirical results or a valid anomaly occurred. Discerning between a “glaring issue” and a “valid anomaly” is also a judgement call by the practitioner (me).

Win Rate

The strategy experienced a win rate that was below expectations for a 15D/10D spread.

Profit / Loss

The strategy itself was unprofitable. Commissions were a material cost and represented 82% (3800 / 4620) of the total P/L.

Performance

Risk Management

Overall

The proprietary strategy was unprofitable.

Discussion

This strategy was a play on the outer edge of the theta-decay curve. By opening positions 45DTE then closing them after, at most, 5 trading days, there is very little time for theta decay to occur. When coupled with a spread width of just 5 delta and an aggressive early-management strategy that prevents winners from running (early management of spreads can be considered a “double risk management” – once by structurally capping losses and once by variably caping time in the market), there is simply not enough premium retained after losses and commissions to turn a profit.

Summary

Systematically opening one SPY short vertical put spread 45 DTE 15D/10D each Monday and exiting the following Friday, skipping weekend exposure, from Jan 3 2007 through Dec 4 2020 was unprofitable.

Thoughts? Feedback? Dedications? Shoutouts? Leave a message in the comments below!

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