EEM 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 EEM short put 45 DTE leveraged position each trading day from Jan 3 2007 through Aug 2 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold EEM.

There are 10 backtests in this study evaluating over 31,000 EEM short put 45 DTE leveraged trades.

Let’s dive in!

Summary

Systematically opening 45 DTE leveraged short put positions on EEM was profitable for all strategies.

All option strategies except 5D @ 50% max profit or 21 DTE outperformed buy-and-hold EEM with regard to total return.

Methodology

Strategy Details

• Symbol: EEM
• Strategy: Short Put
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2019-08-02
• Positions opened per trade: 1
• Entry Days: daily
• Entry Signal: N/A
• 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
• 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 across all strategies.

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

The higher the delta, the lower the premium capture.

Early management had lower rates of premium capture vs holding till expiration.

Win Rate

Managing trades early had mixed results with regard to win rate.

The riskier the trade the lower the win rate, with exception being the 5D strategy.

Annual Volatility

Monthly Returns

Max Drawdown

Drawdown Days

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

10.90% – the blended average percent of profits spent on commission across all option strategies.

Total P/L

Higher delta strategies yielded greater total P/L than lower delta strategies with exception being 50D hold-till-expiration.

Early management yielded a lower P/L across all strategies except 50D.

Overall

All option strategies were profitable.

Discussion

EEM was the only underlying in which a cash-secured backtest outperformed buy and hold with regard to total return. The hypothesis was that a leveraged options strategy on EEM would also outperform and outperform to a greater extent. Let’s compare:

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