EEM Short Put 45 DTE Cash-Secured Options Backtest
In this post we’ll take a look at the backtest results of opening one EEM short put each trading day from Jan 3 2007 through August 6 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 31,200 EEM short put trades.
Let’s dive in!
Contents
Summary
Systematically selling short puts on EEM is profitable.
Five of the EEM short put cash-secured option strategies 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: 2019-08-06
- Positions opened pre 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): 20% | 1x leverage
- Max Drawdown Target: 99% | account value shall not go negative
Assumptions
- Margin requirements are always satisfied
- Margin calls never occur
- 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
- Early assignment never occurs
Mechanics
- Prices are in USD
- Prices are nominal (not adjusted for inflation)
- All statistics are pre-tax, where applicable
- Margin collateral is held as cash and earns no interest
- Assignment P/L is calculated by closing the ITM position at 3:46pm ET the day of expiration / position exit
- Commission to open, close early, or expire ITM is 1.00 USD per contract
- Commission to expire worthless is 0.00 USD per contract
- Commission to open or close non-option positions, if applicable, is 0.00 USD
- Slippage is calculated according to the slippage table
- For comprehensive details, visit the methodology page
Results
Win Rate
Managing trades early lowered the win rate.
The higher the delta the lower the win rate.
Annual Volatility
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Worst Monthly Return
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Average P/L Per Day
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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
18.83% – the blended average percent of profits spent on commission across all short put strategies.
Total P/L
Early management underperformed holding till expiration with regard to total return.
The higher the delta the greater the total return.
Overall
All of the option strategies were profitable.
Discussion
This is the first study conducted where a basic, systematic, cash-secured (i.e. non-leveraged) option strategy outperforms the underlying with regard to total return.
As for why this works and hasn’t been arbitraged away, well, I’m not sure. I’ll be happy to speculate and participate in that conversation in the comment section below. If you’re looking for a data-supported answer, I unfortunately don’t have one.
Something I intend to do in the near future is look at leveraged implementations of the best performing, on a risk-adjusted basis, strategy from each study and see how they would have performed.
Update: the EEM Short Put 45 DTE Leveraged backtest is now live.
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EEM short put 45 DTE Bundle$99.00
August 30, 2019 @ 7:00 am
Interestingly, you can tell me how much margin is needed for this approach?
45 days to execution = 6.4 weeks.
This is again 32 trading days.
One EEM = 40$
Volume at peak is therefore 32*40$*100 pieces = 128k
Margin 20% = 26k
So doubled for safety = 52k
Is that right?
August 30, 2019 @ 8:37 am
Sure!
Using the 16D hold-till-expiration strategy, the maximum number of open positions at any time was 44. This occurred twice: Nov 20 2009 and Nov 19 2010. On those days the notional exposure was $154,200 and $182,800 respectively. These would be your stress points, ignoring any buying power expansion risk due to iv fluctuations. Assuming 20% margin requirement, we’re looking at $30,840 and $36,560 + any buffer / safety margin.
August 30, 2019 @ 9:38 am
Thank you so much for your super work.
When I think about it, the question is why.
You have tested the same strategy on several underlyings EEM, IWM, SPY… these are all big indices… the results go in a similar direction – but vary slightly.
Now we have an overperformance.
Why should the EEM be better than the other in the future?
There is no rational explanation for that, is there?
I think the short put strategy is pretty good in itself.
Proposition: Because the strategy is so good and you test different underlyings, there will always be some that outperform over long periods of time. But I think that these changes will… maybe in the next 10 years the SPY will be the Winner
August 30, 2019 @ 10:34 am
My thought is 1) EEM experienced enough volatility to keep premium received relatively high, particularly from Jan 2012 through Jan 2015 while 2) the movements up or down were short in duration. These two attributes appeared to allow the option strategy to outperform while the underlying essentially went nowhere.
Over the course of 2017 alone EEM closed the gap and eventually outperformed the 16D strategy. From 2018 onward it again begin to underperform.
You’re on to something with the testing of different underlying. Indeed, some will simply outperform while others will underperform. My hypothesis was all the indices would underperform; we now see that hypothesis is false.
I’ll eventually start exploring individual stocks. Curious to see whether the general trend for the option strategies is to outperform, underperform, or yield comparable performance relative to buy/hold.
August 31, 2019 @ 7:24 am
In my opinion, individual stocks could be just as interesting, even if the analyses are more elaborate.
Will you test David’s SPY Put Write Stop strategy? I read about it in the Ern blog comments. With the stops at 2x,3x and 5x premium…?
We have only 1 year so far… Does not say so much so far…
September 3, 2019 @ 3:24 pm
Yes, I’ll add it to the list. Looking to get the TLT and VXX studies out the door this and next Friday, respectively. I may be able to make it for the following Friday.
David’s strategy revolves around VIX – when below a given threshold trade ~2DTE and when above a given threshold trade ~45DTE.
Keeping consistent with previous methodology, I’ll test the 45DTE strategy with 1-5x stop losses and compare against early mgmt with no stop losses and holding till expiration. That should cover all the bases.
Let me know if I’m overlooking anything or if there are any adjustments I should make to the approach.
September 9, 2019 @ 2:11 pm
The SPY short put study has been updated with 1x-5x stop loss details.
https://spintwig.com/spy-short-put-strategy-performance
September 11, 2019 @ 4:39 am
Great, there’s another thing. DTE! ERN is a big follower always only the shortest distance to act, so 2 days. You are relatively fixed in your evaluations on 21 days. He explains why shorter periods are better. Whether then each day must be acted is questionable. Interesting is from Friday on Monday on Wednesday on Friday… This evaluation would be in my eyes the final examination.
September 11, 2019 @ 4:43 am
Sorry not 21 – i meant 45 Days
September 23, 2019 @ 12:16 am
It’s on the list 🙂
February 22, 2020 @ 10:28 am
Premiums on lower deltas are pretty low. Its even worth doing it for such a low premium. Looks like 16D is sweetspot. Comments?
February 22, 2020 @ 3:57 pm
Agree. 16D has the best risk-adjusted returns so it’s a great starting point for implementing int’l exposure in a portfolio.
The nice thing is, if you’re targeting a specific amount of volatility as opposed to a specific amount of return (great for managing sequence of returns risk), there are several strategies to choose from that outperform buy/hold without using leverage. It all comes down to your goal(s).
January 28, 2021 @ 1:47 pm
I’ve been looking at a strategy that can be applied in an IRA where margin cannot be used (were generating any alpha with cash secured options is almost impossible) so this would be a good possible option to look more into. Any other recommendations based on your studies?
January 28, 2021 @ 7:45 pm
Yes, this would be a viable choice if the portfolio seeks exposure to international equities. Alternatively, I’m partial to an allocation toward individual mREIT preferred shares.
https://spintwig.com/cumulative-income-investing-in-preferred-shares/