DIA Short Put 45 DTE Leveraged Options Backtest

3 min read

In this post we’ll take a look at the backtest results of opening one DIA short put 45 DTE leveraged position each trading day from Jan 3 2007 through Feb 26 2021 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold DIA.

There are 10 backtests in this study evaluating over 35,200 DIA short put 45 DTE leveraged trades.

Let’s dive in!

Summary

Systematically opening DIA short put 45 DTE leveraged positions was profitable no matter which strategy was selected.

The 30D hold-till-expiration and both 50D strategies outperformed DIA with regard to total return.

Methodology

Strategy Details

• Symbol: DIA
• Strategy: Short Put
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2021-02-26
• Positions opened per trade: 1
• Entry Days: daily
• Entry Signal: N/A
• Timing 3:46pm ET
• Strike Selection
  • 5 delta +/- 4.5, closest to 5
  • 10 delta +/- 5, closest to 10
  • 16 delta +/- 6, closest to 16
  • 30 delta +/- 8, closest to 30
  • 50 delta +/- 8, 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
• Max Margin Utilization Target (short option strats only): 100% | 5x leverage
• Max Drawdown Target: 99% | account value shall not go negative

Assumptions

• 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
• Margin requirement for short CALENDAR SPREAD positions is 20% of the short option (short option expires after the long option)
• Margin requirement for long CALENDAR SPREAD positions is the net cost of the spread (short option expires before the long option)
• Early assignment never occurs
• There is ample liquidity at all times
• Margin calls never occur (starting capital is set using hindsight bias so that max margin utilization never exceeds 100%)
• Apply a 20% discount to displayed results. For example, if a strat depicts a CAGR of 10%, assume that it’ll yield 8% in practice.

Mechanics

• Prices are in USD
• Prices are nominal (not adjusted for inflation)
• All statistics are pre-tax, where applicable
• 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 position exit if managed early or 4:00pm if held till expiration
• Commission to open, close early, or expire ITM is 1.00 USD per non-index underlying (eg: SPY, AAPL, etc.) contract
• Commission to open, close early, or expire ITM is 1.32 USD per index underlying (eg: SPX, RUT) contract
• Commission to expire worthless is 0.00 USD per contract (non-index and index)
• 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 $1000 increments such that max margin utilization is between 80-100%, closest to 100%, of max margin utilization target
• Starting capital for long option backtests is adjusted in $1000 increments such that max drawdown is between 80-100%, closest to 100%, of max drawdown target
• Positions that have an exit date beyond the backtest end date are excluded
• For comprehensive details, visit the methodology page

Results

Starting Capital

Early management allows a smaller starting portfolio value since the maxim number of concurrent positions is capped. Less capital is “turned over” faster vs holding till expiration.

Margin Utilization

Early management yielded a lower average margin utilization vs holding till expiration.

Hindsight bias was used to maximize Reg-T margin utilization for each strategy. This allows a “best case” scenario for the option strategy to outperform the benchmark.

Also displayed is the date in which each strategy experienced maximum margin utilization.

Premium Capture

Early management had lower rates of premium capture vs holding till expiration. 5D was an exception.

Premium capture was mixed across delta targets.

Win Rate

Managing trades early underperformed holding till expiration with regard to win rate.

The higher the delta, the lower the win rate.

Monthly Returns

Max Drawdown

Max Drawdown Duration

Average Trade Duration

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

Compound Annual Growth Rate

Annual Volatility

Sharpe Ratio

Profit Spent on Commission

8.61% – the average percent of profits spent on commission across profitable option strategies.

Total P/L

Early management underperformed holding till expiration with regard to total P/L. 5D and 50D were exceptions.

Higher delta strategies yielded greater total P/L than lower delta strategies.

Overall

All option strategies were profitable.

Discussion

A year after the Feb/Mar 2020 bout of volatility, DIA has not only recovered all its losses but reached a new all-time high. Meanwhile, with exception of the 30D hold-till-expiration and both 50D strategies, none of the option portfolios reached their previous high-water mark.

Additional Resources

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