July 30, 2021

DIA Short Put 7 DTE Leveraged Options Backtest

spintwig.com Options 7 DTE, backtest, DIA, Early Management, Hold Till Expiration, Leveraged, Short Put 0

3 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 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

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.

DIA Short Put 7 DTE L max margin utilization table

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.