Short SPX Iron Condor 7-DTE s1 signal Options Backtest

4 min read

An iron condor is a delta-neutral (at order entry) 4-leg option strategy that is comprised of a vertical put and a vertical call that are opened at the same time and with matching expiration dates. Maximum profit is the credit received from both vertical positions and is achieved when the underlying is between the short-leg strikes at expiration.

Opening a short iron condor position on an underlying is speculation that the realized volatility of the underlying will be less then the implied volatility, with long legs to hedge potential losses. It’s not a “pure play” on volatility – like a volatility swap – due to the delta exposure that shifts as the underlying moves, but it’s a reasonable start / substitute for a retail trader.

Research suggests that 7-DTE short SPX vertical puts have generally experienced positive expected value. Meanwhile, research also suggests that 7-DTE short SPX calls have generally experienced a negative expected value. Based on the short call research, it would be reasonable to extrapolate that short vertical calls would also generally experience a negative expected value.

Since we know that the call “side” of a short SPX iron condor strategy is systematically unprofitable, it would therefore make sense to simply sell the vertical put only. This of course begs the question: “what’s the point of an iron condor?” Is there a diversification benefit between the calls and puts where the sum of the parts is greater than the whole? Or is it a strategy invented by brokerages and trading educators to maximize commissions and minimize risk of account blow up in order to extract the most value from account holders?

We’ll take a look at the backtest results of opening one short SPX iron condor 7-DTE position each trading day from Jan 3 2007 through Sep 29 2023 and see if there are any discernible trends.

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, and far-ITM short call and short vertical call positions on VIX, are most likely to be profitable at expiration. s1 is based on data from Cboe and S&P Global.

This study seeks to explore the following theses:

1. if we open and hold-till-expiration a short SPX iron condor 7-DTE position on the days in which s1 is TRUE, and take no action on the days in which s1 is FALSE, we will outperform, with regard to total return, risk-adjusted return, and max drawdown (and consequently capital efficiency), a strategy that opens and holds-till-expiration every trading day
2. if we open and hold-till-expiration a short SPX iron condor 7-DTE position on the days in which s1 is FALSE, and take no action on the days in which s1 is TRUE, we will underperform, with regard to total return, risk-adjusted return, and max drawdown (and consequently capital efficiency), a strategy that opens and holds-till-expiration every trading day
3. if we open and hold till expiration a short SPX iron condor 7-DTE position on the days in which s1 is TRUE, with a max margin utilization target of 100%, we will outperform, with regard to total return, risk-adjusted return, and max drawdown, a 100% SPY buy-and-hold portfolio with dividends reinvested (total return)

To test these theses we will:

1. limit order entry to only the days in which s1 = TRUE to see if the strategy outperforms daily entry with regard to total return, risk-adjusted return, and max drawdown (and consequently capital efficiency)
2. limit order entry to only the days in which s1 = FALSE to see if the strategy underperforms daily entry with regard to total return, risk-adjusted return, and max drawdown (and consequently capital efficiency)
3. limit order entry to only the days in which s1 = TRUE, with a max margin utilization target of 100%, to see if the strategy outperforms a 100% SPY buy-and-hold portfolio with dividends reinvested (total return) with regard to total return, risk-adjusted return, and max drawdown.

Performance of the s1 signal is explored in different contexts in other s1 signal studies.

There are 18 backtests in this study evaluating over 43,100 short SPX iron condor 7-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!

Summary

Thesis 1

Thesis 2

Thesis 3

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Methodology

Strategy Details

• Symbol: SPX
• Strategy: Short Iron Condor
• Days Till Expiration: 7-DTE +/- 4, closest to 7
• Start Date: 2007-01-03
• End Date: 2023-09-29
• Positions opened per trade: 1
• Entry Days:
  • each trading day
  • each trading day in which the s1 signal = TRUE
  • each trading day in which the s1 signal = FALSE
• Entry Signal: s1 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
• Trade Entry
  • 10-delta short / 5-delta long
  • 16-delta short / 5-delta long
  • 16-delta short / 10-delta long
  • 30-delta short / 5-delta long
  • 30-delta short / 10-delta long
  • 30-delta short / 16-delta long
• Trade Exit
  • Hold till expiration
• Max Margin Utilization Target (short option strats only): 100%
• 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 (eg: avoid margin calls) complete 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 10-delta short / 5-delta long SPX iron condor 7-DTE trade. We’ll look at opening a 10-delta short / 5-delta long daily, opening a 10-delta short / 5-delta long only on days when s1 = TRUE, opening a 10-delta short / 5-delta long only on days when s1 = FALSE, then benchmark everything against buy-and-hold SPY with dividends reinvested (total return).

Starting Capital and Leverage

Win Rate Stats

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:

Up-to-date s1 signal historical boolean values and s1 signal historical raw + boolean values are available for download in the trade log store.

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