December 10, 2021

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

spintwig.com Options 180 DTE, 365 DTE, 45 DTE, 7 DTE, 90 DTE, backtest, Hold Till Expiration, Leveraged, s1 signal, Short Put, SPY/SPX 0

5 min read

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!

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)

Daily s1 signal email alert is available as a 7-day free trial and can be enabled / disabled in the subscriber dashboard.

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 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

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.

SPX Short Put 50D max margin utilization table

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

SPX Short Put 7-365 (LEAPS) DTE s1 average monthly p_l

SPX Short Put 50D average monthly p l table

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:

positive values indicate improvement vs daily entry while negative values indicate degradation

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.

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: