SPY Long Call 45 DTE Options Backtest

3 min read

In this post we’ll take a look at the backtest results of opening one SPY long call 45 DTE position each trading day from Jan 3 2007 through Apr 30 2020 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold SPY.

There are 20 backtests in this study evaluating over 66,600 SPY long call 45 DTE trades.

Let’s dive in!

Summary

Systematically opening SPY long call 45 DTE positions was profitable for half of the strategies.

None of the options strategies outperformed buy-and-hold SPY with regard to total return.

Methodology

Strategy Details

• Symbol: SPY
• Strategy: Long Call
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2020-04-30
• Positions opened per trade: 1
• Entry Days: daily
• Entry Signal: N/A
• Timing: 3:46pm ET
• Strike Selection
  • 5 delta +/- 4.5 delta, closest to 5
  • 10 delta +/- 5 delta, closest to 10
  • 16 delta +/- 6 delta, closest to 16
  • 30 delta +/- 8 delta, closest to 30
  • 50 delta +/- 8 delta, closest to 50
• Trade Entry
  • 5D long call
  • 10D long call
  • 16D long call
  • 30D long call
  • 50D long call
• Trade Exit
  • 10% profit on premium paid or 21 DTE, whichever occurs first
  • 25% profit on premium paid or 21 DTE, whichever occurs first
  • 50% profit on premium paid or 21 DTE, whichever occurs first
  • Hold till expiration
• Max Margin Utilization Target (short option strats only): N/A
• Max Drawdown Target: 99% | account value shall not go negative

Results

Starting Capital

Early management allows a smaller starting portfolio value since the maxim number of concurrent positions is capped. Less capital is “turned over” faster vs holding till expiration.

Win Rate

Managing trades early outperformed holding till expiration with regard to win rate.

The higher the delta the higher the win rate.

Monthly Returns

Max Drawdown

Max Drawdown Duration

Average Trade Duration

The lower the profit target the shorter the average trade duration.

Compound Annual Growth Rate

Annual Volatility

Sharpe Ratio

Profit Spent on Commission

124.33% – the blended average percent of profits spent on commission across all option strategies.

Total P/L

Early management underperformed holding till expiration with regard to total P/L. 30D and 50D were exceptions.

Higher delta strategies yielded greater total P/L than lower delta strategies.

Overall

Half of the option strategies were profitable.

Discussion

Let’s take a closer look at the equity curves for each of the exit strategies.

Long calls are sometimes referred to as lottery tickets due to their unlimited upside and limited downside characteristics.

To achieve lottery-ticket-like returns, holding till expiration is necessary. However, just like with a lottery, a lot of money can be spent on long call options that never win [big].

It turns out that the most profitable configuration is to open 50D positions and manage them at 10% profit on premium paid (or exit at 21 DTE if 10% is never achieved). If the option is $1000 to buy, exit when the position is worth $1100.

You might ask: “Why allocate $10,000 to a portfolio dedicated to call buying when $10,000 allocated to SPY has handily outperformed?”

There are scenarios where one may not want to own the underlying and/or may want to limit their losses. Consider TSLA. In less than a year TSLA’s share price went from $211.00 to $1,794.99. If the sentiment is that TSLA is the next tulip craze, buying a call allows one to participate in the upside rally while limiting losses to the cost of the long call.

Additional Resources

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