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, 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.
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
- 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
Results
Overall

Starting Capital and Leverage

Win Rate Stats
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Profit and Loss Stats
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Performance Stats
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Risk Management
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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:

Up-to-date s1 signal historical boolean values and s1 signal historical raw + boolean values are available for download in the trade log store.
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Additional Resources
Trade Log Bundles
Visit the trade log store and download the data used in this and other backtests.

Private, Custom Backtests
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Quality, Custom Trade Logs
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Consultations
Schedule a consultation to review your specific scenario and get direct answers to your money 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.