SPY s1 signal Equity Backtest

In this post we’ll take a look at the backtest results of using the s1 signal to open (or not) a long and/or short SPY position each trading day from Jan 3 2007 through Apr 29 2022 and see if there are any discernible trends.
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.
Existing research on the s1 signal suggests there is a material PnL, sharpe and max-drawdown advantage when selling put options when the signal is true, and when buying put options as a left-tail hedge against SPX decline when the signal is false.
Theses:
- if we open and hold a long SPY position only on the days in which s1 is TRUE, we will outperform a buy and hold SPY portfolio with regard to PnL, sharpe, and max drawdown. On days when s1 is FALSE, close any long SPY position and go to cash.
- if we open and hold a short SPY position only on the days in which s1 is FALSE, we will outperform a buy and hold SPY portfolio with regard to PnL, sharpe, and max drawdown. On days when s1 is TRUE, close any short SPY position and go to cash.
- if we combine the first two ideas, we will outperform either idea on its own with regard to PnL, sharpe and max drawdown
To test these theses we will:
- Review the s1 signal each morning.
- If s1 signal = TRUE, open a long SPY position at market open and hold this position until the next morning.
- If s1 signal = FALSE, if there’s an existing long position, close it at market open. Otherwise, take no action.
- Review the s1 signal each morning.
- If s1 signal = FALSE, open a short SPY position at market open and hold this position until the next morning.
- If s1 signal = TRUE, if there’s an existing short position, close it at market open. Otherwise, take no action.
- Review the s1 signal each morning.
- If s1 signal = TRUE, if there’s an existing short position, close it at market open and open a long SPY position.
- If s1 signal = FALSE, if there’s an existing long position, close it at market open and open a short SPY positions.
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 3 backtests in this study evaluating over 7,700 SPY equity trades.
Let’s dive in!
Contents
Summary
Thesis 1: opening and maintaining a long SPY position only on the days in which s1 is TRUE, and on days when s1 is FALSE, closing any long SPY position and going to cash outperformed a buy-and-hold SPY portfolio with regard to:
- Total PnL
- Sharpe ratio
- Annualized volatility
- Max drawdown
- Max drawdown duration
- Capital efficiency: 193% | 2.9x improvement
Thesis 2: opening and maintaining a short SPY position only on the days in which s1 is FALSE, and on days when s1 is TRUE, closing any short SPY position and going to cash outperformed a buy-and-hold SPY portfolio with regard to:
- Annualized volatility
- Capital efficiency: N/A | strategy had a negative return
Thesis 3: closing any short SPY position and opening and maintaining a long SPY position only on the days in which s1 is TRUE, and on days when s1 is FALSE, closing any long SPY position and opening and maintaining a short SPY position outperformed a buy-and-hold SPY portfolio with regard to:
- Total PnL
- Max drawdown
- Capital efficiency: 20% | 0.2x improvement
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Methodology
Strategy Details
- Symbol: SPY
- Strategy: Long/Short Equity
- Days Till Expiration: N/A
- Start Date: 2007-01-03
- End Date: 2022-04-29
- Positions opened per trade: 1
- Entry Days: each trading day in which s1 signal = TRUE
- Entry Signal: s1 signal
- Timing: 9:30am ET
- Strike Selection: N/A
- Trade Entry Delta: N/A
- Trade Exit: s1 signal
- Max Margin Utilization Target (short option strats only): N/A | 1x 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 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 and Leverage

Starting capital was held constant across all strategies.
Win Rate Stats

Opening long SPY positions when s1 = TRUE or opening short SPY positions when s1 = FALSE had no material influence in win rate.
The magnitude of the s1 = TRUE wins increased by 50% and the spread between the average win and loss narrowed by 80% vs buy-and-hold (-3 bps vs -15 bps)
Profit and Loss Stats

s1 = TRUE signal outperformed buy-and-hold total return by 55%.
This 55% total return outperformance occurred while participating in the market only 53% of the time vs buy-and-hold.
The formula to calculate capital efficiency is:
( ( strat return / benchmark return ) / ( strat occurrences / benchmark occurrences ) -1 ) * 100
In this example we get:
- strat return = strat income / strat starting capital = ( 45,380 / 10,000 ) = 4.53
- benchmark return = benchmark income / strat starting capital = ( 29,316 / 10,000 ) = 2.93
When we plug in the numbers to the overall formula we get:
- ( ( 4.53 / 2.93 ) / ( 2040 / 3855 ) -1 ) * 100 = 192.52
s1 = TRUE signal yields a 193% increase, or 2.9x improvement in capital efficiency vs buy-and-hold SPY
Performance Stats

s1 = TRUE signal outperformed buy-and-hold with regard to annual volatility and risk-adjusted return.
Risk Management

s1 = TRUE signal outperformed buy-and-hold with regard to max drawdown and max drawdown duration. It also outperformed with regard to the best and worst monthly returns.
Overall

Holding a long position when s1 = True and the mixed long/short strategies were eventually profitable. Shorting SPY when s1 = False was eventually unprofitable.
Discussion
The results of opening and maintaining positions only on the days in which the s1 signal = TRUE is compelling. Performance over shorter time periods may underperform, such as the two year range from Jan 1 2016 to Dec 31 2017.
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:

Daily s1 signal email alert is available as a 7-day free trial and can be enabled / disabled in the subscriber dashboard.
Additional Resources
Private, Custom Backtests
Discover your edge with private, custom backtests for as little as 99 USD. Learn more or contact us for a quote.

Trade Logs
Visit the trade log store and download the data used in this and other backtests.
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Consultations
Schedule a consultation to review your specific scenario and get direct answers to your questions.
Data Used in Study
This strategy uses historical SPY data from Yahoo! Finance. A copy of the zipped CSV file is here. The latest version of the historical s1 signal true/false data can be purchased for $49 USD. Contact me for a purchase link.