RUT Short Put 45 DTE s4 signal Options Backtest
In this post we’ll take a look at the backtest results of opening one RUT short put 45 DTE position each trading day from Jan 3 2007 through Aug 31 2022 and see if there are any discernible trends.
We will also explore the performance of the s4 signal. The s4 signal is a boolean (TRUE / FALSE) daily indicator that attempts to identify the days in which short put and short vertical put positions on the Russell 2000 are most likely to be profitable at expiration. s4 is based on data from Cboe and S&P Global.
This study seeks to explore the following theses:
- if we open and hold-till-expiration a RUT short put 45 DTE position on the days in which s4 is TRUE, and take no action on the days in which s4 is FALSE, we will outperform, with regard to total return, risk-adjusted return, max drawdown, and max drawdown duration (and consequently capital efficiency), a strategy that opens and holds-till-expiration every trading day
- if we open and hold-till-expiration a RUT short put 45 DTE position on the days in which s4 is FALSE, and take no action on the days in which s4 is TRUE, we will underperform, with regard to total return, risk-adjusted return, max drawdown, and max drawdown duration (and consequently capital efficiency), a strategy that opens and holds-till-expiration every trading day
- if we open and hold till expiration a RUT short put 45 DTE position on the days in which s4 is TRUE, with a max margin utilization target of 100%, we will outperform, with regard to total return, risk-adjusted return, max drawdown, and max drawdown duration, a 100% IWM buy-and-hold portfolio with dividends reinvested (total return)
To test these theses we will:
- limit order entry to only the days in which s4 = TRUE to see if the strategy outperforms daily entry with regard to total return, risk-adjusted return, max drawdown, and max drawdown duration (and consequently capital efficiency)
- limit order entry to only the days in which s4 = FALSE to see if the strategy underperforms daily entry with regard to total return, risk-adjusted return, max drawdown, and max drawdown duration (and consequently capital efficiency)
- limit order entry to only the days in which s4 = TRUE, with a max margin utilization target of 100%, to see if the strategy outperforms a 100% IWM buy-and-hold portfolio with dividends reinvested (total return) with regard to total return, risk-adjusted return, max drawdown, and max drawdown duration
Performance of the s4 signal is explored in different contexts in other s4 signal studies.
There are 15 backtests in this study evaluating over 38,700 RUT short put 45 DTE trades.
The data used in this study was provided by ORATS via a professional license paid for by spintwig LLC.
Build the same ORATS trade logs used in this study with an individual license, discounted up to 66% for spintwig clients and readers (affiliate link) or download the finished product from our trade log store.
Let’s dive in!
Contents
Summary
Thesis 1
Thesis 2
Thesis 3
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Methodology
Strategy Details
- Symbol: RUT
- Strategy: Short Put
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-01-03
- End Date: 2022-08-31
- Positions opened per trade: 1
- Entry Days:
- each trading day
- each trading day in which the s4 signal = TRUE
- each trading day in which the s4 signal = FALSE
- Entry Signal: s4 signal
- Timing 3:46pm ET
- Strike Selection
- 5 delta +/- 4.5, closest to 5
- 10 delta +/- 5, closest to 10
- 16 delta +/- 6, closest to 16
- 30 delta +/- 8, closest to 30
- 50 delta +/- 8, closest to 50
- Trade Entry
- 5D short put
- 10D short put
- 16D short put
- 30D short put
- 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, where the short option expires after the long option, is 20% of the short option
- Margin requirement for long CALENDAR SPREAD positions, where the short option expires before the long option, is the net cost of the spread
- Margin requirement for short IRON CONDOR positions is the difference between the call-side strikes if both sides are the same width, otherwise margin requirement is the width of the wider side
- 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
- Option positions are opened at 3:46pm ET
- Option positions are closed at 3:46pm ET (4:00pm if closed on the date of expiration)
- Commission to open, close early, or expire ITM is 1.00 USD per non-index underlying (eg: SPY, IWM, AAPL, etc.) contract
- Commission to open, close early, or expire ITM is 1.32 USD per index underlying (eg: SPX, RUT, etc.) 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
Overall
Starting Capital
Margin Utilization
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 by identifying the minimum amount of starting capital necessary to successfully complete (eg: avoid margin calls) the backtest.
Capital Efficiency
Win Rate
Premium Capture
Monthly Returns
Max Drawdown
Max Drawdown Duration
Average Trade Duration
Average Trade Delta
Compound Annual Growth Rate
Annual Volatility
Sharpe Ratio
Profit Spent on Commission
Total PnL
Discussion
Let’s take a closer look at the RUT short put 45 DTE 5-delta trade. We’ll look at opening a position daily, opening a position only on days when s4 = TRUE, opening a position only on days when s4 = FALSE, then benchmark everything against buy-and-hold IWM with dividends reinvested (total return).
Starting Capital and Leverage
Win Rate Stats
Profit and Loss Stats
Note the low the premium capture for daily entry. There is minimal volatility risk premium to be earned. This is one of the closest-to-zero-sum strats studied to date.
Performance Stats
Risk Management
Limiting order entry to days in which the s4 signal = TRUE yields a greater total return vs a daily-entry strategy while materially lowering max drawdown, annualized volatility, commission drag and consequently boosting premium capture and risk-adjusted return.
Think about it for a moment. An investor trades roughly half as often and generates nearly the same total return. There’s no need to swing at every pitch; open a position only when it’s worthwhile.
Distribution of s4 signals
The s4 = TRUE signal, while suggesting order entry on roughly half the trading days since 2007, is not evenly distributed throughout time. Here’s a breakdown of participation rate by year:
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Additional Resources
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