February 11, 2022

GLD Short Put 7-365 DTE (LEAPS) s2 signal Options Backtest

spintwig.com Options 180 DTE, 365 DTE, 45 DTE, 7 DTE, 90 DTE, backtest, GLD, Hold Till Expiration, Leveraged, s2 signal, Short Put 0

5 min read

In this post we’ll take a look at the backtest results of opening one GLD short put 7 DTE through 365 DTE (LEAPS) position each trading day from Jul 1 2010 through Dec 31 2021 and see if there are any discernible trends. Backtest duration is limited due to availability of historical data from CBOE.

We will also explore the performance of the s2 signal. The s2 signal is a boolean (TRUE / FALSE) daily indicator that attempts to identify the days in which short put positions on the SPDR Gold Trust ETF are most likely to be profitable at expiration. s2 is based on data from CBOE and S&P Global.

The thesis is that if we limit order entry to only the days in which s2 is TRUE, we will be “swinging at only the best pitches.” On the days when s2 is FALSE, take no action. Existing positions will remain untouched and no new positions will be opened.

To test this thesis we will:

limit order entry to only the days in which s2 = TRUE to see if the strategy outperforms daily entry in a statistically significant way
limit order entry to only the days in which s2 = FALSE to see if the strategy underperforms daily entry in a statistically significant way

Performance of the s2 signal is explored in different contexts in other, non-paywalled s2 signal studies.

All this talk about signals is fine and dandy but a signal-based strategy in isolation isn’t helpful. Let’s compare it against the following benchmark and see how it performs:

GLD buy/hold (total return) | 100% allocation, no leverage

There are 15 backtests in this study evaluating over 27,800 GLD short put 7 DTE through 365 DTE (LEAPS) leveraged trades.

Let’s dive in!

Summary

The s2 signal yielded a material improvement in capital efficiency over “market-agnostic” daily short put strats for the following durations:

7 DTE +/- 4, closest to 7
45 DTE +/- 17, closest to 45
90 DTE +/- 30, closest to 90
180 DTE +/- 45, closest to 180
365 DTE +/- 180, closest to 365

The s2 signal outperformed a “buy and hold” strategy with regard to:

total return (all strats)
risk-adjusted return (all strats)
annualized volatility (4 out of 5 strats)
max drawdown (1 out of 5 strats)
max drawdown duration (2 out of 5 strats)

The s2 signal outperformed a “market agnostic” daily short put strategy with regard to:

total return (3 out of 5 strats)
risk-adjusted return (4 out of 5 strats)
annualized volatility (all strats)
max drawdown (all strats)
max drawdown duration (4 out of 5 strats)
win rate (all strats)
premium capture (all strats)
profit spent on commission (all strats)

Daily s2 signal email alert is available as a 7-day free trial and can be enabled / disabled in the subscriber dashboard.

Methodology

Strategy Details

Symbol: GLD
Strategy: Short Put
Days Till Expiration:
- 7 DTE +/- 4, closest to 7
- 45 DTE +/- 17, closest to 45
- 90 DTE +/- 30, closest to 90
- 180 DTE +/- 45, closest to 180
- 365 DTE +/- 180, closest to 365
Start Date: 2010-07-01
End Date: 2021-12-31
Positions opened per trade: 1
Entry Days: each trading day in which s2 signal = TRUE
Entry Signal: s2 signal
Timing 3:46pm ET
Strike Selection
- 50 delta +/- 8, closest to 50
Trade Entry
- 50D short put
Trade Exit
- 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 PnL 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

Starting capital requirements of the s2 = TRUE strategies were lower than the daily-entry strategies. 5D was an exception.

Margin Utilization

s2 = TRUE yielded a lower average margin utilization vs daily entry.

GLD Short Put 50D 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

s2 = TRUE had higher rates of premium capture vs daily entry.

Win Rate

s2 = TRUE outperformed daily entry with regard to win rate.

Monthly Returns

GLD Short Put 50D average monthly p l table

s2 = TRUE underperformed daily entry with regard to average monthly return. 365 DTE was an exception.

s2 = TRUE outperformed buy/hold with regard to average monthly return.

Also displayed is the best and worst monthly returns for each strategy.

Max Drawdown

s2 = TRUE outperformed daily entry with regard to max drawdown.

s2 = TRUE underperformed buy/hold with regard to max drawdown.

Max Drawdown Duration

s2 = TRUE signal outperformed daily entry with regard to max drawdown duration. 180 and 365 DTE were exceptions.

Average Trade Duration

The average trade duration for all strategies was consistent across strategies.

Compound Annual Growth Rate

s2 = TRUE signal outperformed daily entry with regard to compound annual growth rate. 90 DTE and 180 DTE were exceptions.

Annual Volatility

s2 = TRUE signal outperformed daily entry with regard to annual volatility.

Sharpe Ratio

s2 = TRUE signal outperformed daily entry with regard to sharpe ratio. 180 DTE was an exception

The 365 DTE s2 = TRUE signal strategy had the greatest risk-adjusted return among the option strategies.

Profit Spent on Commission

8.56% – the average percent of profits spent on commission across profitable option strategies.

Total P/L

s2 = TRUE signal outperformed daily entry with regard to total P/L. 90 DTE and 180 DTE were exceptions.

Overall

All option strategies were eventually profitable.

Discussion

The results of opening positions only on the days in which the s2 signal = TRUE is compelling. Let’s take a look under the hood and see what’s happening in a bit more detail. In the comparison we’ll look at buy/hold GLD, opening a 45 DTE short put daily, opening a 45 DTE short put only on days when s2 = TRUE, and opening a 90 DTE short put only on days when s2 = FALSE.

Starting Capital and Leverage

Trading exclusively when the s2 = TRUE requires less starting capital to successfully execute the strategy vs s2 = FALSE.

Win Rate Stats

The s2 = TRUE strat has just under 50% ( 1431 / 2865 ) of the number of occurrences vs daily entry.

Profit and Loss Stats

To calculate capital efficiency of the s2 signal, let’s strip out the impacts of interest on margin collateral and commissions and look at strictly the P/L of the options themselves. The formula is:

( ( strat return / benchmark return ) / ( strat occurrences / benchmark occurrences ) -1 ) * 100

In this example we get:

strat return = ( 51,599 / 85,500 ) = 0.60
benchmark return = ( 62,418 / 127,200 ) = 0.49

When we plug in the numbers to the overall formula we get:

( ( 0.60 / 0.49 ) / ( 1431 / 2865 ) -1 ) * 100 = 145
s2 signal yields a 2.5x increase in capital efficiency vs daily entry for the 45 DTE strat

Across all the strats we have:

Performance Stats

Risk adjusted return when s2 = TRUE is 1.6x greater than daily entry.

Risk Management

Max drawdown when s2 = TRUE is 19% shallower vs daily entry. s2 = TRUE also recovers from the max drawdown.

Limiting order entry to days in which the s2 signal = TRUE yielded anywhere from 1.4x to 2.5x improvements in capital efficiency vs a daily-entry strategy. Individual performance metrics included lowering max drawdown, max drawdown duration, annualized volatility, commission drag and consequently boosting premium capture total return, and risk-adjusted return.

Think about it for a moment. An investor trades roughly half as often and generates nearly the same or more total return. There’s no need to swing at every pitch; open a position only when it’s worthwhile.

The s2 = TRUE signal, while suggesting order entry on roughly half the trading days since 2009, is not evenly distributed throughout time. Here’s a breakdown of participation rate by year: