DIA Short Put 7 DTE Leveraged Options Backtest

5 min read

In this post we’ll take a look at the backtest results of opening one DIA short put 7 DTE leveraged position each trading day from Sep 4 2012 through May 28 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.

Backtest duration is limited due to the release date of Friday-expiring weekly options on DIA.

There are 10 backtests in this study evaluating over 21,441 DIA short put 7 DTE leveraged trades.

Let’s dive in!

Summary

Systematically opening DIA short put 7 DTE leveraged positions was profitable no matter which strategy was selected.

The 50D hold-till-expiration strategy outperformed DIA with regard to total return.

Methodology

Strategy Details

• Symbol: DIA
• Strategy: Short Put
• Days Till Expiration: 7 DTE +/- 4, closest to 7
• Start Date: 2012-09-04
• End Date: 2021-05-28
• 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 expiration, 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 arbitrarily set so that max margin utilization never exceeds 100%)
• Apply a 20% discount on displayed results. For example, if a strat depicts a CAGR of 10%, assume that it’ll yield 8% in practice. This is to account for hindsight bias being used when determining starting capital in the backtest.

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

This is the section where I usually say: “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.” However, in this scenario it turns out that early management required a greater amount of starting capital more often than not.

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.

The higher the delta the lower the premium capture. 10D and 16D early management were exceptions.

Win Rate

Managing trades early outperformed 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

17.56% – 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.

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

Overall

All option strategies were eventually profitable.

Discussion

Let’s compare the Sharpe ratio between the leveraged and cash-secured strategies:

Additional Resources

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