November 26, 2021

EEM Short Put 7 DTE Leveraged Options Backtest

spintwig.com Options 7 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 7 DTE leveraged position each trading day from Sep 1 2011 through July 30 2021 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold EEM.

Backtest duration is limited due to the release date of weekly options on EEM.

There are 10 backtests in this study evaluating over 25,500 EEM short put 7 DTE leveraged trades.

Let’s dive in!

Summary

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

None of the early-management option strategies outperformed EEM with regard to total return.

All of the hold-till-expiration option strategies outperformed EEM with regard to total return.

Methodology

Strategy Details

Symbol: EEM
Strategy: Short Put
Days Till Expiration: 7 DTE +/- 4, closest to 7
Start Date: 2011-09-01
End Date: 2021-07-30
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

The idea that early management is more capital efficient than holding till expiration did not hold true in this backtest.

Margin Utilization

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

EEM 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.

Premium Capture

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

The higher the delta the lower the premium capture.

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

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Max Drawdown

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Max Drawdown Duration

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Average Trade Duration

Managing trades at 50% max profit or expiration yielded trade durations circa 70% the duration of hold-till-expiration.

Early management underperformed holding till expiration with regard to time-weighted return.

Compound Annual Growth Rate

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Annual Volatility

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Sharpe Ratio

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Profit Spent on Commission

52.78% – the average percent of profits spent on commission across profitable option strategies.

Total P/L

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Overall

All option strategies were eventually profitable.

Discussion

The 45 DTE version of this study showed much promise with 9 out of 10 backtests outperforming the benchmark with regard to total return. Nice!

It appears that the 7 DTE version of this strategy, with its start date after the global financial crisis, still manages to outperform the benchmark with regard to total return when holding positions till expiration. Meanwhile, risk adjusted return was multiples higher. And this is after taking into account the fact that commissions consumed over 23% (!) of profits.

Early management has a less rosy story. Commissions frequently turn profitable trades negative. When averaged across the entire duration of the backtest, commissions consumed around 80% of profits. No bueno, señor.