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!
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.
- 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
- 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
- Prices are in USD
- Prices are nominal (not adjusted for inflation)
- 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
Managing trades early lowered the win rate.
The higher the delta the lower the win rate.
Worst Monthly Return
Average P/L Per Day
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
Profit Spent on Commission
18.83% – the blended average percent of profits spent on commission across all short put strategies.
Early management underperformed holding till expiration with regard to total return.
The higher the delta the greater the total return.
All of the option strategies were profitable.
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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