In this post we’ll take a look at the backtest results of opening one GE short put 45 DTE cash-secured position each trading day from January 3 2007 through August 30 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold GE.
There are 10 backtests in this study evaluating over 29,700 GE short put 45 DTE cash-secured trades.
Let’s dive in!
- Symbol GE
- Strategy Short Put
- Start Date 2007-01-03
- End Date 2019-08-30
- Positions opened 1
- Entry Days every trading day in which entry criteria is satisfied
- 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
- 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
This study seeks to measure the performance of opening option positions and will interpret the results from the lens of income generation relative to buy-and-hold.
The utility or effectiveness of options as a hedging tool or other use will not be discussed and is out of scope.
Managing trades early lowered the win rate for all strategies except 50D.
Baring the 5D and 10D early management strategies which suffered from commission drag, the riskier the trade 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
Time in Market
All strategies experienced over 98% market participation throughout the duration of the backtest.
Profit Spent on Commission
Of the single strategy that was profitable, nearly 30% of profits were spent on commission.
Higher delta strategies yielded greater losses than lower delta strategies.
Holding till expiration yielded greater profits than managing early.
Only the 5D hold-till-expiration strategy was profitable.
Early management took the edge off of volatility and worst monthly return. However, like with T, it does this at the cost of lower overall returns.
- The underlying price was between ~$6.70-$42 over the last 12 years. Over 41% of the time the underlying was less than or equal to $20. Thus, premium collected was small in absolute terms and closing a trade early took a disproportionately large bite out of the profits.
- Because $1 or $0.50 differences in strike price can represent up to a 7.4% expected move in the underlying, opening a position daily often resulted in having up to 15 or more positions in the same strike/expiration for a given delta target.
- If a position is underwater or otherwise <50% max profit when it’s managed at the 21 DTE target, all 15+ positions are closed at what may be an actual (position ITM / negative P/L) or consequential (negative P/L after commission) loss.
- Compare this to SPY where $1 is less than a 1% expected move in 2007 and, consequently, positions in the same CUSIP rarely exceeds 3.
This is also the first study in which a cash-secured strategy “blows up.” The USO study is a great example of a steady money loser. However, all the option strategies outperformed the underlying (albeit still having a negative P/L). With GE, implementing early management on a 50D strategy causes the P/L to dip below $0 before the backtest ends. Ouch.
Systematically opening cash-secured short put positions on GE was unprofitable across the board except for the 5D hold-till-expiration strategy.
Seven of the cash-secured GE short put strategies outperformed buy-and-hold GE on a total return basis. However, only three outperformed on a risk-adjusted basis.
The 5D @ hold-till-expiration had the greatest risk-adjusted return among the cash-secured option strategies.
Thanks for reading 🙂
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