Selling options outperformed in these 3 VIX environments

4 min read

When selling options, there is a generalization that a higher VIX equates to more premium received. If VIX is at 20, selling a 16-delta 45 DTE SPX put option may fetch $25.00 in premium. If VIX is at 30, that same option may fetch $37.50 in premium. Sell more options when VIX is elevated, right?

In this study we explore the performance of selling 16-delta 45 DTE SPX put options in 4 different VIX environments:

• VIX < 15
• VIX >= 15 and VIX < 20
• VIX >= 20 and VIX < 25
• VIX >= 25

These breakpoints were selected because the count of occurrences in each bin is roughly 25% of the total number occurrences. This provides a reasonable amount of trades to work with in each bin.

One SPX short put 45 DTE 16D position is opened each trading day from Jan 3 2007 through Oct 31 2022 when the opening price of VIX, as reported by Cboe, is within the respective range.

We will also explore the performance of the s1 signal. The s1 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 S&P 500 are most likely to be profitable at expiration. s1 is based on data from Cboe and S&P Global.

Performance of the s1 signal is explored in different contexts in other, non-paywalled s1 signal studies.

There are 15 backtests in this study evaluating over 7,880 SPX short put 45 DTE 16-delta leveraged trades across 4 VIX environments.

Let’s dive in!

Summary

Selling 45 DTE 16D put options on SPX when VIX >= 15 and VIX < 20 underperformed all other VIX environments with regard to total return and risk-adjusted return.

Selling 45 DTE 16D put options on SPX when s1 = True outperformed daily entry and s1 = False with regard to total return and risk-adjusted return across all VIX environments.

The s1 signal yielded up to a 310% / 4.1x improvement in capital efficiency over “market-agnostic” daily short put strats.

The daily s1 signal email alert is available as a 7-day free trial. Start making data-driven trades today.

Methodology

Strategy Details

• Symbol: SPX
• Strategy: Short Put
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2022-09-27
• Positions opened per trade: 1
• Entry Days:
  • every trading day
  • when VIX < 15
  • when VIX >= 15 and VIX < 20
  • when VIX >= 20 and VIX < 25
  • when VIX >= 25
• Entry Signal: VIX level, s1 signal
• Timing 3:46pm ET
• Strike Selection: 16 delta +/- 6, closest to 16
• Trade Entry: daily, s1 = true, s1 = false, VIX environment
• 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 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

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.

Also displayed is the date in which each strategy experienced maximum margin utilization.

Premium Capture

Win Rate

Monthly Returns

Max Drawdown

Max Drawdown Duration

Average Trade Duration

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

Compound Annual Growth Rate

Annual Volatility

Sharpe Ratio

Profit Spent on Commission

Capital Efficiency

Total PnL

Overall

Discussion

Selling puts when VIX is between 15 and 20 was a difficult trade, experiencing a notably-lower total return and a commensurate sharpe ratio. Applying the s1 signal nearly tripled the premium capture rate, but since the “market agnostic” daily-entry capture rate was so low, even a ~3x boost leaves this VIX environment as one of the worst performing among all the backtests in the study. One upside is that max drawdown isn’t as severe, but that’s not saying much when the strategy was yielding peanuts.

Let’s take a look under the hood and see what’s happening in a bit more detail. We’ll look at:

• buy/hold SPY (total return)
• opening a 45 DTE 16-delta short put each trading day that VIX is >= 15 and < 20
• opening a 45 DTE 16-delta short put each trading day that VIX is >= 15 and < 20 AND that s1 = True
• opening a 45 DTE 16-delta short put each trading day that VIX is >= 15 and < 20 AND that s1 = False

Starting Capital and Leverage

Win Rate Stats

The total count of trades held till expiration is below 100% despite the strategy calling for “hold till expiration”. This is due to the fact that 2 positions with a 2015-12-18 (Friday) exit date were “dirty” and had an expiration date of 2015-12-19 (Saturday) listed. When crunching the numbers, the fact that the trade exited before expiration lowered this count accordingly.

Across the entire study, there were 4 such trades where a 2015-12-18 exit was dirty and had a 2015-12-19 date listed.

The methodology here at spintwig is to use the data exactly as is comes from the source(s). No alterations, no omissions, no additions.

The s1 = TRUE strat has just over 51% ( 583 / 1131 ) of the number of occurrences vs daily entry.

Profit and Loss Stats

Performance Stats

Risk Management

Distribution of s1 signals

The s1 = 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:

The daily s1 signal email alert is available as a 7-day free trial. Start making data-driven trades today!

Additional Resources

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