QQQ Short Put 45 DTE Leveraged Options Backtest
In this post we’ll take a look at the backtest results of opening one QQQ short put 45 DTE leveraged position each trading day from April 1 2011 through Sept 30 2020 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold QQQ.
Backtest duration is limited due to the lack of CBOE data on QQQ prior to Mar 23 2011.
There are 10 backtests in this study evaluating over 23,700 QQQ short put 45 DTE leveraged trades.
Let’s dive in!
Contents
Summary
Systematically opening QQQ short put 45 DTE leveraged positions was profitable no matter which strategy was selected.
The 50D early-management and hold-till-expiration strategies, as well as the 30D hold-till-expiration strategy, outperformed QQQ with regard to total return.
Methodology
Strategy Details
- Symbol: QQQ
- Strategy: Short Put
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2011-04-01
- End Date: 2020-09-30
- Positions opened per 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): 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 P/L 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
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.
Margin Utilization
Early management yielded a lower average margin utilization vs holding till expiration.
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
Early management had lower rates of premium capture vs holding till expiration.
The higher the delta, the lower the premium capture. 5D was an exception, as was 10D early management.
Win Rate
Managing trades early underperformed holding till expiration with regard to win rate.
The higher the delta, the lower the win rate.
Monthly Returns
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Max Drawdown
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Max Drawdown Duration
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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
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Annual Volatility
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Sharpe Ratio
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Profit Spent on Commission
6.80% – the average percent of profits spent on commission across profitable option strategies.
Total P/L
Early management underperformed holding till expiration with regard to total P/L.
Higher delta strategies yielded greater total P/L than lower delta strategies.
Overall
All option strategies were profitable.
Discussion
It appears both 50D strategies as well as the 30D hold-till-expiration strategy outperformed buy-and-hold QQQ with regard to both risk-adjusted and total return. Neat! However, this does not come without some caveats.
From a risk management perspective, when compared to buy/hold QQQ the 50D strategies experienced:
- worst monthly returns that were over 2x more severe
- max drawdowns that were 53-56% greater in magnitude
Despite these less-than-ideal risk factors, the annualized volatility of the 50D hold-till-expiration strategy is actually less than that of buy/hold QQQ.
If a portfolio is being constructed to prioritize softer losses over stronger gains, short puts on QQQ may not be the best tool to use. Even the 5D early management strategy experienced a max drawdown on par with buy/hold QQQ. Lower risk, defined as max drawdown, was not realized with the low-delta strategies despite the expectation of a lower return.
Shifting gears, early management underperformed hold-till-expiration with regard to nearly all key performance indicators (KPIs). The idea that states early management outperforms holding till expiration did not apply here.
Additional Resources
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November 20, 2020 @ 8:56 am
Excellent backtest. Nice work.
Taking it one step further, for the 30D or 50D, what happens if one covers when the option goes ITM?
And another step further, un-covers if it goes back OTM? And repeat.
November 22, 2020 @ 10:30 am
Thanks Paul! When you say cover the position when it goes ITM, are you thinking of a stop loss that triggers to exit the option position or a short QQQ position that opens to delta hedge?
January 14, 2021 @ 12:13 pm
Tastytrade teaches that you are better off managing early (50% or 21DTE). They beat on this point almost daily. Isn’t this study contradicting their findings? Can you comment further about this discrepancy? I’m trying to understand why Tastytrade data is different. Thanks.
January 15, 2021 @ 1:56 am
They do. It’s been a while since I checked out their content but I recall the early management benefit was demonstrated on SPY. My SPY 45DTE cash-secured study confirms their findings: https://spintwig.com/spy-short-put-strategy-performance/#Sharpe_Ratio-2
My SPY leveraged study does show some improvements for some of the delta targets but it’s not very compelling aside from the materially smaller starting capital needed to implement the strategy: https://spintwig.com/spy-short-put-45-dte-leveraged-options-backtest/#Sharpe_Ratio-2
Short answer: different underlying, different results.
A performance-improving mechanic or signal on one ticker doesn’t necessarily carry over to others. Also, timing luck is likely involved. I know TT liked to open a single position then roll it. My methodology opens a position daily in order to mitigate timing luck.