September 18, 2020

SPY Short Call 0 DTE Options Backtest

spintwig.com Options 0 DTE, backtest, Early Management, Hold Till Expiration, Leveraged, Short Call, SPY/SPX 4

2 min read

In this post we’ll take a look at the backtest results of opening one SPY short call 0 DTE 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 trades.

Let’s dive in!

Summary

Systematically opening SPY short call 0 DTE 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 call
- 10D short call
- 16D short call
- 30D short call
- 50D short call
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, 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

Margin Utilization

SPY Short Call 0 DTE L max margin utilization table

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.