SPY Short Call 45 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 45 DTE leveraged position each trading day from January 3 2007 through July 9 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold SPY.

There are 20 backtests in this study evaluating over 61,900 SPY short call 45 DTE leveraged trades.

Let’s dive in!

Summary

Systematically opening 45 DTE leveraged short call positions on SPY was profitable for 12 out of 20 strategies.

None of the option strategies outperformed buy/hold with regard to total return.

Methodology

Strategy Details

• Symbol: SPY
• Strategy: Short Call
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2019-07-09
• Positions opened per trade: 1
• Entry Days: daily
• Entry Signal: N/A
• Timing 3:46pm ET
• Strike Selection
  • 5 delta +/- 1.5 delta, closest to 5
  • 10 delta +/- 2.0 delta, closest to 10
  • 16 delta +/- 2.5 delta, closest to 16
  • 30 delta +/- 3.0 delta, closest to 30
  • 50 delta +/- 3.5 delta, closest to 50
• Trade Entry
  • 5D short call
  • 10D short call
  • 16D short call
  • 30D short call
  • 50D short call
• Trade Exit
  • 25% max profit or 21 DTE, whichever occurs first
  • 50% max profit or 21 DTE, whichever occurs first
  • 75% 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 allows a smaller starting portfolio value since the maxim number of concurrent positions is capped. Less capital is “turned over” faster than holding till expiration.

Margin Utilization

Early management yielded a lower average margin utilization.

Hindsight bias was used to maximize Reg-T margin utilization for each strategy. This allows for a “best case” scenario, baring the limitations of backtesting such as no margin calls, for the option strategy to outperform relative to the benchmark.

Also displayed is the date in which each strategy experienced maximum margin utilization.

Premium Capture

The higher the delta, the lower the premium capture sans the 5D and 10D 25% and 50% early management strategies due to excessive commission drag.

For the profitable strategies, early management yielded lower rates of premium capture than holding till expiration.

Win Rate

Managing trades early provided mixed results for the win rate and tended to perform better with higher-delta positions.

The riskier the trade the lower the win rate.

Annual Volatility

Monthly Returns

Max Drawdown

Drawdown Days

Average Trade Duration

Managing trades at 50% max profit or 21 DTE yielded trade durations less than half the duration of hold-till-expiration.

Compound Annual Growth Rate

Sharpe Ratio

Profit Spent on Commission

Many of the strategies were either unprofitable or paid out all their profits (and then some) in commissions. Of the profitable strategies, the blended rate of profits spent on commission was 58.29%.

Total P/L

Higher delta strategies yielded less profit than lower delta strategies.

Holding till expiration yielded lower profits than managing early on all strategies except 5D, again due to commission drag.

Overall

12 of the 20 option strategies were profitable.

Discussion

Selling calls on SPY is a difficult trade. As we saw in the 45 DTE cash-secured call selling study on SPY, selling covered calls in a tax-sheltered account is a losing strategy. A portfolio of covered call strategies on SPY would have a total return less than a simple buy/hold strategy, despite receiving premium along the way.

When applying leverage to the SPY short call 45 DTE strategy, lower risk strategies (low delta and aggressive early management) actually turn a profit. However, higher risk strategies begun to underperform. Here’s a look at the respective CAGR profiles for each strategy:

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