In this post we’ll take a look at the backtest results of opening one IWM short put 45 DTE leveraged position each trading day from Jan 3 2007 through July 24 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold IWM.
There are 10 backtests in this study evaluating over 31,300 IWM short put 45 DTE leveraged trades.
Let’s dive in!
- Symbol IWM
- Strategy Short Put
- Start Date 2007-01-03
- End Date 2019-07-24
- 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 invested in 3mo US treasuries and earns interest daily
- 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
- Starting capital for short option backtests is adjusted in $100 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 $100 increments such that max drawdown is between 80-100%, closest to 100%, of max drawdown target
- 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.
Early management allows a smaller starting portfolio value since the maxim number of concurrent positions is capped. Less capital is “turned over” faster vs holding till expiration.
Early management yielded a lower average margin utilization across all strategies.
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.
The higher the delta, the lower the premium capture.
Early management had lower rates of premium capture vs holding till expiration.
Managing trades early lowered the win rate across all strategies.
The riskier the trade the lower the win rate.
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
8.91% – the blended average percent of profits spent on commission across all option strategies.
Higher delta strategies yielded greater total P/L than lower delta strategies.
Early management yielded a lower P/L across all strategies except 10D.
All option strategies profitable.
Half the systematic option strategies on IWM outperformed buy-and-hold on both a risk-adjusted and total-return basis. For easy comparison, here are the sharpe ratio charts for the IWM cash-secured and leveraged studies:
As was the case with the SPY Short Put 45 DTE Leveraged study, applying leverage to a profitable option strategy:
- Widens the distribution of sharpe ratio values
- Lowers the sharpe ratio of higher-delta strategies
- Raises the sharpe ratio of lower-delta strategies
Additional research will determine whether these characteristics are specific to index ETFs or if they apply as a general rule of thumb to all leveraged option strategies.
Systematically opening 45 DTE leveraged short put positions on IWM was profitable no matter which strategy was selected.
The 5D @ 50% max profit or 21 DTE strategy had the greatest risk-adjusted return among the option strategies.
All 16D and 30D strategies as well as the 50D @ 50% max profit strategy outperformed buy-and-hold IWM on both total return and risk-adjusted return.
Thanks for reading 🙂
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