SPY Short Call 0 DTE Cash-Secured Options Backtest
In this post we’ll take a look at the backtest results of opening one SPY short call 0 DTE cash-secured position each trading day from Feb 1 2018 through Jul 15 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.
Backtest duration is limited to due to the release date of Monday-expiring weekly options on SPY (see SEC release 34-82733). Timing luck can’t be factored out prior to Feb 2018.
There are 10 backtests in this study evaluating over 5,900 SPY short call 0 DTE cash-secured trades.
Let’s dive in!
Contents
Summary
Systematically opening SPY short call 0 DTE cash-secured positions was profitable no matter which strategy was selected.
None of the option strategies outperformed SPY with regard to total return.
Methodology
Strategy Details
- Symbol: SPY
- Strategy: Short Call
- Days Till Expiration: 0 DTE +/- 3, closest to 0
- Start Date: 2018-02-01
- End Date: 2020-07-15
- 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 short put
- 10D short put
- 16D short put
- 30D short put
- 50D short put
- Trade Exit
- 50% max profit or expiration, whichever occurs first
- Hold till expiration
- Max Margin Utilization Target (short option strats only): 20% | 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 options expires before the long option, is the net cost of the spread
- 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
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.
The effects of early management are muted due to the “ultra short” duration of 0-3 DTE options.
Margin Utilization
Early management yielded a lower average margin utilization vs holding till expiration.
Hindsight bias was used to maximize Reg-T margin utilization for each strategy. This allows a “best case” scenario for the option strategy to outperform the benchmark.
Also displayed is the date in which each strategy experienced maximum margin utilization.
Premium Capture
Early management had mixed rates of premium capture vs holding till expiration.
The higher the delta, the lower the premium capture. 30D was an exception.
Win Rate
Managing trades early outperformed holding till expiration with regard to win rate.
The higher the delta, the lower the win rate.
Monthly Returns
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Max Drawdown
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Max Drawdown Duration
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Average Trade Duration
Managing trades at 50% max profit or expiration yielded no material change in average trade duration.
Compound Annual Growth Rate
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Annual Volatility
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Sharpe Ratio
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Profit Spent on Commission
25.90% – the average percent of profits spent on commission across profitable option strategies.
Total P/L
Early management outperformed holding till expiration with regard to total P/L. 5D was an exception.
Total profit and loss performance was mixed across delta targets.
Overall
All option strategies were profitable.
Discussion
My hypothesis walking into this study was that performance would be similar to the 45-DTE version – unprofitable in virtually all scenarios.
It turns out my hypothesis was wrong. All strategies were profitable across all scenarios.
This is likely due to the distribution of IV overstatement across deltas being more uniform at 0-DTE vs 45-DTE.
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.
s1 signal
Trade S&P 500 options more efficiently using the s1 signal. Learn more.
s2 signal
Trade GLD options more efficiently using the s2 signal. Learn more.
s4 signal
Trade Russell 2000 options more efficiently using the s4 signal. Learn more.
mREIT Preferred Share Dashboard
High-yield, low-beta alternatives to cash or treasury bills. Learn more.
Consultations
Schedule a consultation to review your specific scenario and get direct answers to your questions.
-
SPY short call 0 DTE Bundle$49.99
September 4, 2020 @ 11:23 am
This is very interesting, I’m surprised 0 DTE calls alone were able to profit over time. It’s no wonder the 0 DTE strategies are so popular in Facebook groups. Add in short puts, and you have a strategy with a really nice risk-adjusted return.
September 10, 2020 @ 11:34 pm
Yeah, these 0DTE studies are quite revealing.
It’s worth calling out is it’s not “free” gains. The risk here is gamma. That nickel short option can inflate to a dollar or more at the drop of a hat. Plan accordingly for those periodic 20x swings in P/L.
September 10, 2020 @ 6:34 pm
For me the results were surprising. They were both disheartening and a tribute of the astounding efficiency of this market. CAGR of roughly 2% more or less over two and a half years of daily trading. Maybe this should not be quite so surprising for arguably what is the most competitive and liquid market on the planet but I found it so. There must be other markets with a more profound systemically overstated IV and sufficient liquidity to make such a strategy more rewarding on a risk adjusted basis. Or, maybe not. So many quants, so little time 🙂
September 10, 2020 @ 11:46 pm
There appears to be something with 45-DTE short puts on EEM but I haven’t looked at it in the last year or so; the trend may have reversed. It’s been the only significant outlier that I’ve found to date.
Cash-Secured: https://spintwig.com/eem-short-put-options-backtest-results/
Leveraged: https://spintwig.com/eem-short-put-45-dte-leveraged-options-backtest/