SPY Long Call 730 DTE Options Backtest (LEAPS)
In this post we’ll take a look at the backtest results of opening one SPY long call 730 DTE position (LEAPS) each trading day from Jan 3 2007 through May 5 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 10 backtests in this study evaluating over 30,000 SPY long call 730 DTE (LEAPS) trades.
Let’s dive in!
Contents
Summary
Systematically opening 730 DTE long call positions on SPY was profitable no matter which strategy was selected.
The 50D hold-till-expiration strategy outperformed buy/hold SPY with regard to total return.
Methodology
Strategy Details
- Symbol: SPY
- Strategy: Long Call
- Days Till Expiration: 730 DTE +/- 180, closest to 730
- Start Date: 2007-01-03
- End Date: 2020-05-05
- 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
- 50% increase in option value or expiration, whichever occurs first
- Hold till expiration
- Max Margin Utilization Target (short option strats only): N/A
- Max Drawdown Target: N/A | arbitrary amount of starting capital used
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 PnL 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
All backtests started with a hypothetical $1 million portfolio.
Win Rate Statistics
Managing trades early outperformed holding till expiration with regard to win rate.
Higher delta positions had higher win rates than lower delta positions; 5D early management was an exception.
Worth noting is that the number of positions closed differs between exit strategies even though the entry criteria is identical. This is because trades are counted only when they are exited [due reaching a profit target or when the option contract expires].
Since these are 2-year LEAPS positions, hold-till-expiration positions opened after Q1 2018 have not yet expired and therefore are not counted since it’s unknown whether they will be profitable or expire worthless. Meanwhile, positions opened after Q1 2018 that are part of the early-management strategy reach profit targets after roughly 9 months per the table below. This means early-management positions opened at late as Q2 2019 count toward the total number of occurrences.
Managing trades at 50% increase in value yielded trade durations less than half the duration of hold-till-expiration.
Performance Statistics
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P/L Statistics
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Risk Management
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Overall
All of the option strategies were profitable.
Discussion
LEAPS provide an interesting proposition: make money so long as the future is swell.
It took the 50D hold-till-expiration strategy 9 years and nearly $1M to finally outperform buy/hold SPY.
A major risk of LEAPS is the duration capital is at risk. The GFC caused the strategy to be unprofitable for 4 years and flounder around for another 3 before finally getting a huge bump to almost be on par with buy/hold.
I have no doubts the recent market turmoil will have a similar effect, causing 3-6 months worth of LEAPS to miss profitability targets and expire worthless due to poor timing luck. That is, LEAPS on SPY typically expire in a cadence similar to futures – quarterly every March, Jun, September and December. Had the pandemic occurred 90 days earlier or later, losses could potentially have been avoided.
Additional Resources
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Trade Logs
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Consultations
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May 9, 2020 @ 8:24 am
What do you use for 50% max profit on a LEAP call; wouldn’t it be unlimited? Also, if the max loss is the purchase value, how can the 50D account go negative? Thanks!
May 10, 2020 @ 11:46 am
Looks like all the charts & post was corrected. Please ignore my questions. All makes sense now. Thanks!
May 10, 2020 @ 12:08 pm
Yes, sorry about that. This was my first study consisting of 100% long positions so identifying a respective methodology and ensuring accurate code may take a few iterations.
The reporting templates I use are designed for short strategies; I updated it to “50% increase in option value”. Also, my code had a bug that manifest when a strategy is 100% long positions. This has been corrected and the updated data has been republished.
Feedback and questions like yours help tremendously. Thanks for reading and commenting!
May 14, 2020 @ 6:00 pm
This is a good one. I’m trying to figure out how LEAPs should fit into a portfolio. Seems overly aggressive to buy one every day, but maybe a strategy of buying during corrections would be a big winner.
May 17, 2020 @ 12:13 am
That’s a good idea. I may add that to the list of backtests – opening a SPY LEAP when VIX is above or below “x”. The downside in practice is that one won’t know if they’re right or wrong for a while. They’ll have to wait for expiration (or a VIX pop if taking profits early).
October 25, 2020 @ 1:03 am
So leaps did fine during the march 2020 crash? Looks like it stayed profitable, was it bc IV increased so much?
October 25, 2020 @ 10:40 pm
Need more data points to tell. LEAPS have a 3-6mo expiration cycle. If I reran this with data through June 30 or later we’d be able to see whether the LEPAS for this cycle were still profitable despite the drop (and sharp recovery).
I’ve been meaning to redo this study to align it with the other debit strategies, so will likely have an answer soon.
January 13, 2021 @ 6:04 am
Based on your analysis, I would be interested to know how the simulation would look if the scenarios were expanded to include 70D, 84D, 90D, and 95D compared against the information above. (My hypothesis is that those strategies would perform better than the <=50D scenarios).
Great modeling, information and analysis! I greatly appreciate all of your efforts and willingness to publish results. In attempting to gather information on SPY vs. SPX LEAP returns in taxable vs. non-tax accounts, I luckily came across your work. Thank you!
January 14, 2021 @ 10:07 am
Thanks for stopping by Doug! Good question; my hypothesis is similar. If you like I can run those backtests for you – can do SPY and/or SPX. Send me a PM using the “Contact” page and I can send a scope of work for your review.
Glad to hear this information was helpful!
July 18, 2021 @ 6:49 pm
I’m confused. On the return chart what does 16D 50 mean?
16 delta bought with the window of selling them every 50 days if they hit 50% profit or just until expiration?
July 18, 2021 @ 7:57 pm
16D 50 = long 16 delta position closed at 50% increase in value or expiration, whichever occurs first.
April 27, 2022 @ 11:13 pm
Would you mind doing a other blog post with itm calls? In this one you went up to 50 delta. Can we get a part 2 where we see 50 delta all the way up to 95 delta backtested?
April 30, 2022 @ 12:08 am
Sure! I’ll add it to the list.