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!
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.
- 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
- 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.
- 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
The idea that early management is more capital efficient than holding till expiration did not hold true in this backtest.
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.
Early management had lower rates of premium capture vs holding till expiration.
The higher the delta the lower the premium capture.
Managing trades early outperformed holding till expiration with regard to win rate.
The higher the delta the lower the win rate.
Max Drawdown Duration
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
Profit Spent on Commission
52.78% – the average percent of profits spent on commission across profitable option strategies.
All option strategies were eventually profitable.
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.
Private, Custom Backtests
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