In this post we’ll take a look at the backtest results of opening one SPY long call 730 DTE position 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 trades.
Let’s dive in!
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.
- 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
- 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.
- 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
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 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.
All of the option strategies were profitable.
Position with an expiration date over 12 months away provide an interesting proposition: make money so long as the future is well.
It took the 50D hold-till-expiration strategy 9 years and nearly $1M to finally outperform buy/hold SPY.
A major risk of long-dated positions 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 positions to miss profitability targets and expire worthless due to poor timing luck. That is, long-dated positions 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.
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