SPX Short Put 7-365 DTE (LEAPS) s1 signal Options Backtest

In this post we’ll take a look at the backtest results of opening one SPX short put 7 DTE through 365 DTE (LEAPS) position each trading day from Jan 3 2007 through Oct 29 2021 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 are most likely to be profitable at expiration. s1 is based on data from CBOE and S&P Global.
The thesis is that if we limit order entry to only the days in which s1 is TRUE, we will be “swinging at only the best pitches.” On the days when s1 is FALSE, take no action. Existing positions will remain untouched and no new positions will be opened.
To test this thesis we will:
- limit order entry to only the days in which s1 = TRUE to see if the strategy outperforms daily entry in a statistically significant way
- limit order entry to only the days in which s1 = FALSE to see if the strategy underperforms daily entry in a statistically significant way
Performance of the s1 signal is explored in different contexts in other, non-paywalled s1 signal studies.
All this talk about signals is fine and dandy but a signal-based strategy in isolation isn’t helpful. Let’s compare it against the following benchmark and see how it performs:
- SPY buy/hold (total return) | 100% allocation, no leverage
There are 15 backtests in this study evaluating over 35,300 SPX short put 7 DTE through 365 DTE (LEAPS) leveraged trades.
Let’s dive in!
Contents
Summary
The s1 signal yielded a material improvement in capital efficiency over “market-agnostic” daily short put strats for the following durations:
- 7 DTE +/- 4, closest to 7
- 45 DTE +/- 17, closest to 45
- 90 DTE +/- 30, closest to 90
- 180 DTE +/- 45, closest to 180
The s1 signals’s 50D short put 7, 45, 90 and DTE strats outperformed buy/hold SPY with regard to:
- total return
- risk-adjusted return
- annualized volatility
- max drawdown
- max drawdown duration
The s1 signal outperformed a comparable “market agnostic” daily short put strategy with regard to:
- total return (2 out of 5 strats)
- risk-adjusted return (all strats)
- annualized volatility (all strats)
- max drawdown (all strats)
- max drawdown duration (4 out of 5 strats)
- win rate (3 out of 5 strats)
- premium capture (4 out of 5 strats)
- profit spent on commission (all strats)
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Methodology
Strategy Details
- Symbol: SPX
- Strategy: Short Put
- Days Till Expiration:
- 7 DTE +/- 4, closest to 7
- 45 DTE +/- 17, closest to 45
- 90 DTE +/- 30, closest to 90
- 180 DTE +/- 45, closest to 180
- 365 DTE +/- 180, closest to 365
- Start Date: 2007-01-03
- End Date: 2021-10-29
- Positions opened per trade: 1
- Entry Days: each trading day in which s1 signal = TRUE
- Entry Signal: s1 signal
- Timing 3:46pm ET
- Strike Selection
- 50 delta +/- 8, closest to 50
- Trade Entry
- 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 options expires before the long option, is the net cost of the spread
- 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
Starting Capital


Starting capital requirements of the s1 = TRUE strategies were generally lower than the daily-entry strategies.
Margin Utilization


s1 = TRUE signal yielded a lower average margin utilization vs daily entry.

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


s1 = TRUE signal had higher rates of premium capture vs daily entry. 365 DTE was an exception.
Win Rate

s1 = TRUE signal outperformed daily entry with regard to win rate. 90 DTE and 365 DTE were exceptions.
Monthly Returns
s1 = TRUE signal underperformed daily entry with regard to average monthly return.
Also displayed is the best and worst monthly returns for each strategy.
Max Drawdown
s1 = TRUE signal outperformed daily entry with regard to max drawdown.
Max Drawdown Duration
s1 = TRUE signal outperformed daily entry with regard to max drawdown duration. 365 DTE was an exception.
Average Trade Duration
The average trade duration for all strategies was consistent.
Compound Annual Growth Rate
s1 = TRUE signal underperformed daily entry with regard to compound annual growth rate. 45 DTE and 180 DTE were exceptions.
Annual Volatility
s1 = TRUE signal outperformed daily entry with regard to annual volatility.
Sharpe Ratio
s1 = TRUE signal outperformed daily entry with regard to sharpe ratio.
The 45 DTE s1 = TRUE signal strategy had the greatest risk-adjusted return among the option strategies.
Profit Spent on Commission
0.20% – the average percent of profits spent on commission across profitable option strategies.
Total P/L
s1 = TRUE signal underperformed daily entry with regard to total P/L. 45 DTE and 180 DTE were exceptions.
Overall
All option strategies were eventually profitable.
Discussion
The results of opening positions only on the days in which the s1 signal = TRUE is compelling. Let’s take a look under the hood and see what’s happening in a bit more detail. In the comparison we’ll look at buy/hold SPY, opening a 90 DTE short put daily, opening a 90 DTE short put only on days when s1 = TRUE, and opening a 90 DTE short put only on days when s1 = FALSE.
Trading exclusively when the s1 signal = TRUE requires 39% less starting capital vs s1 = FALSE in order to successfully execute the strategy.
The s1 signal = TRUE strat has 55% ( 1998 / 3658 ) of the number of occurrences vs daily entry.
To calculate capital efficiency of the s1 signal, let’s strip out the impacts of interest on margin collateral and commissions and look at strictly the P/L of the options themselves. The formula is:
( ( strat return / benchmark return ) / ( strat occurrences / benchmark occurrences ) -1 ) * 100
In this example we get:
- strat return = ( 7,184,839 / 1,663,000 ) = 4.32
- benchmark return = ( 11,880,652 / 2,660,000 ) = 4.47
When we plug in the numbers to the overall formula we get:
- ( ( 4.32 / 4.47 ) / ( 1998 / 3658 ) -1 ) * 100 = 76.9
- s1 signal yields a 77% increase in capital efficiency vs daily entry for the 90 DTE strat
Across all the strats we have:
Risk adjusted return when s1 = TRUE is 1.7x greater than daily entry.
Max drawdown when s1 = TRUE is a fraction of all the other strats. Max drawdown duration is also materially shortened.
Limiting order entry to days in which the s1 signal = TRUE yields comparable or greater total return vs a daily-entry strategy while materially lowering max drawdown, max drawdown duration, 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 or more total return. There’s no need to swing at every pitch; open a position only when it’s worthwhile.
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 historical s1 signal boolean values are available for download in the trade log store.
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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Trade Logs
Visit the trade log store and download the data used in this and other backtests.
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