February 7, 2020

EEM Short Put 45 DTE Leveraged Options Backtest

spintwig.com Options 45 DTE, backtest, Early Management, EEM, 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 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, where the short option expires after the long option, is 20% of the short option
Margin requirement for long CALENDAR SPREAD positions, where the short options expires before the long option, is the net cost of the spread
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
Option positions are opened at 3:46pm ET
Option positions are closed at 3:46pm ET (4:00pm if closed on the date of expiration)
Commission to open, close early, or expire ITM is 1.00 USD per non-index underlying (eg: SPY, IWM, AAPL, etc.) contract
Commission to open, close early, or expire ITM is 1.32 USD per index underlying (eg: SPX, RUT, etc.) 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.

EEM short put 45 DTE L max margin utilization table 1

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

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Monthly Returns

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Max Drawdown

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Drawdown Days

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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

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Sharpe Ratio

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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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