SPY Short Call 0 DTE Leveraged Options Backtest

3 min read

In this post we’ll take a look at the backtest results of opening one SPY short call 0 DTE leveraged 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 empirically factored out prior to Feb 2018.

There are 10 backtests in this study evaluating over 5,900 SPY short call 0 DTE leveraged trades.

Let’s dive in!

Summary

Systematically opening SPY short call 0 DTE leveraged positions was profitable across all strategies except 30D.

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 day: 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): 100% | 5x 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

Early management generally 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

Max Drawdown

Max Drawdown Duration

Average Trade Duration

Managing trades at 50% max profit or expiration yielded no material change in average trade duration.

Compound Annual Growth Rate

Annual Volatility

Sharpe Ratio

Profit Spent on Commission

52.73% – 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 except 30D were profitable.

Discussion

My hypothesis walking into this study was that performance would be similar to the 45-DTE version – slightly profitable to unprofitable in virtually all scenarios.

It turns out my hypothesis was wrong. All but the 30D 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. It appears some underpricing of 30D positions is occurring. Said another way: the spread between implied vol (IV) and realized vol (RV) on the 30D positions is narrower than that of the other delta targets.

Let’s take a look at the risk-adjusted returns from this strategy and compare against a cash-secured implementation.

Additional Resources

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