IWM Short Put 45 DTE Cash-Secured Options Backtest
In this post we’ll take a look at the backtest results of opening one IWM 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 IWM.
There are 10 backtests in this study evaluating over 31,500 IWM short put trades.
Let’s dive in!
Contents
Methodology
Core Strategy
- Symbol IWM
- Strategy Short Put
- Start Date 2007-01-03
- End Date 2019-08-06
- Positions opened 1
- Entry Days every trading day
- Timing 4pm ET (EOD pricing)
- Strike Selection
- 5 delta +/- 4 delta, closest to 5
- 10 delta +/- 4 delta, closest to 10
- 16 delta +/- 5 delta, closest to 16
- 30 delta +/- 6 delta, closest to 30
- 50 delta +/- 7 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
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)
- 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
Scope
This study seeks to measure the performance of opening short put positions and will interpret the results from the lens of income generation relative to buy-and-hold IWM.
The utility of the short put strategy as a portfolio hedging tool or other use will not be discussed and is out of scope.
Results
Win Rate
Managing trades early lowered the win rate.
When holding till expiration, realized win rates are about 50% higher than expected win rates.
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
Earlier management results in shorter trade duration.
Lower-risk trades reach profit targets faster than higher-risk trades.
Compound Annual Growth Rate
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Sharpe Ratio
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Profit Spent on Commission
11.90% – the blended average percent of profits spent on commission across all short put strategies.
Total P/L
The riskier the trade the greater the P/L.
Early management benefited the 5D, 10D and 16D strategies whereas holding till expiration yielded a higher total P/L in the 30D and 50D strategies.
Overall
All of the option strategies were profitable.
Discussion
The 50D hold-till-expiration strategy exhibited strong performance and outperformed the underlying until November 2016.
At the end of December 2018 the buy-and-hold IWM portfolio was $202,819 and 50D hold-till-expiration portfolio was $191,050.
That’s a 5.8% difference in value for a 38.1% decrease in annual volatility. Not a bad trade off!
Summary
Systematically selling short puts on IWM is profitable.
All IWM short put strategies underperformed buy-and-hold IWM.
The 10D @ 50% max profit or 21 DTE IWM short put strategy had the greatest risk-adjusted return.
Thanks for reading 🙂
Additional Resources
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Trade Logs
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IWM short put 45 DTE Bundle$99.00
Thoughts? Feedback? Dedications? Shoutouts? Leave a message in the comments below!
March 11, 2021 @ 11:07 am
On the hold till Expiration back tests, what is factored in when the options expire ITM and you get the shares put to you?
March 14, 2021 @ 2:50 pm
1.00 USD commission is charged for the assignment event and the shares are immediately sold at a price equal to the underlying spot at the time of assignment. i.e. no overnight price risk in when unloading the shares.