SPY Short Put 0, 7, and 45 DTE Leveraged Options Backtest
In this post we’ll compare and contrast the leveraged 0 DTE, leveraged 7 DTE and leveraged 45 DTE SPY short put options strategies, after normalizing for the effects of market exposure and timing luck, from Feb 16 2018 through May 29 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.
There are 20 backtests in this study evaluating over 11,100 SPY short put 0 DTE, 7 DTE and 45 DTE leveraged trades.
The 0 DTE and 7 DTE strategies will have all their positions held till expiration. Prior research suggests that early management does not benefit SPY Short Put 0 DTE cash-secured, SPY Short Put 0 DTE leveraged or SPY Short Put 7 DTE leveraged strategies.
The 45 DTE strategy will utilize “50% max profit or 21 DTE” and “hold-till-expiration” exit strategies. Prior research suggests that early management offers mixed results between SPY Short Put 45 DTE cash-secured and SPY Short Put 45 DTE leveraged strategies.
Let’s dive in!
Contents
Summary
Systematically opening SPY short put 0 DTE leveraged positions was profitable no matter which strategy was selected.
The 10, 16, 30 and 50D 0-DTE strategies and 5D 7-DTE strategy all outperformed buy-and-hold SPY with regard to total return.
Methodology
Strategy Details
- Symbol: SPY
- Strategy: Short Put
- Days Till Expiration:
- 0 DTE +/- 3, closest to 0
- 7 DTE +/- 4, closest to 7
- 45 DTE +/- 17, closest to 45
- Start Date: 2018-02-16
- End Date: 2020-06-03
- 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 21 DTE, 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 P/L 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
Shorter-duration strategies allows a smaller starting portfolio value since the maxim number of concurrent positions is capped. Less capital is “turned over” faster vs longer-duration strategies.
Margin Utilization
The 0 DTE and early management strategies yielded a lower average margin utilization across all deltas when compared to longer-duration strategies / 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
Shorter-duration strategies had higher rates of premium capture vs longer-duration strategies.
The higher the delta the lower the premium capture. 50D was an exception in some scenarios.
Win Rate
Shorter-duration strategies outperformed longer-duration strategies with regard to win rate. 45 DTE w/ early management was an exception.
The higher the delta the lower the win rate.
Monthly Returns
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Max Drawdown
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Max Drawdown Date
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Average Trade Duration
Managing 45 DTE trades at 50% max profit or 21 DTE yielded trade durations roughly half the duration of hold-till-expiration.
Compound Annual Growth Rate
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Annual Volatility
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Sharpe Ratio
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Profit Spent on Commission
18.18% – the average percent of profits spent on commission across all profitable option strategies.
Total P/L
Shorter-duration strategies outperformed longer-duration strategies with regard to total P/L.
Higher delta strategies generally yielded greater total P/L than lower delta strategies.
Overall
Half of the option strategies were profitable.
The 10, 16, 30 and 50D 0-DTE strategies and 5D 7-DTE strategy all outperformed buy-and-hold SPY with regard to total return.
Discussion
Let’s take a closer look at the equity curves for each of the DTE targets.
We can see that the 0-DTE strategies have smooth curves / is less volatile relative to the 45 DTE strategies. The longer-duration strategies outperform leading up to the March 2020 drop but then underperform after.
One critique that may be said about this study is the limited duration: 27 months.
The 0-DTE strategy is only able to achieve daily order entry as early as Feb 16 2018. Thus, this is the longest backtest duration possible. Quoting from the SPY Short Put 0 DTE Leveraged study:
On June 4 2010 CBOE released Friday-expiring weekly options on SPY. About 6 years later on August 30 2016 CBOE released Wednesday-expiring weekly options on SPY (see SEC release 34-78686). About 18 months later on February 16 2018 CBOE released Monday-expiring weekly options on SPY (see SEC release 34-82733).
It wasn’t until the introduction of Monday-expiring weekly options that the 0-DTE strategy could support opening a position daily (tolerances for 0 DTE is 0-3 DTE, closest to 0 – explained in more detail in the methodology section).
Why is there value in opening a position daily? It helps mitigate timing luck. Consider the following hypothetical 45 DTE short put trade:
Suppose a trader “A” started the strategy at some arbitrary date; their trade is represented by the red line. A week later trader “B” started the strategy, represented by the yellow line, and opens a similar 45 DTE position with an expiration date 1 week later than trader “A” . Trader “C” started the strategy a week after trader “B” and is represented by the green line.
Trader A and B may have shares of SPY put to them come expiration (or experience a negative P/L if managed at 21 DTE). Meanwhile, trader C will have a profitable trade. These nuances, summed over the span of a multi-year implementation, will yield different strategy results depending on strategy start date despite the strategy being mechanically identical. This effect generally becomes more pronounced the longer the expiration cycle (read: longer DTE) and less pronounced the shorter the expiration cycle (shorter DTE).
By opening trades daily, these nuances average out and strategy performance reflects an “average” amount of timing luck. For reference, an alternative approach to handle timing luck is to implement portfolio tranches and identify a performance variance.
While the backtest duration may leave some desiring a longer track record, the span of time covers one of the fastest transitions to a bear market in recent history along with one of the best one-month returns in recent history.
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July 10, 2020 @ 8:21 am
Nice. 0 DTE -16D seems to be the sweetspot from risk-reward point of view. Is 0 DTE is opening a day before expiration before market close? BigErn does 3 DTE
July 10, 2020 @ 8:23 am
Forgot to ask is this backtest applicable to SPX?
July 10, 2020 @ 11:12 am
0 DTE is opening the day of expiration. Indeed, he does.
Yes, SPX results should be very similar.
July 10, 2020 @ 2:53 pm
Isn’t SPX quite a bit more dangerous because the options expire on a Thursday but are priced based on Friday’s opening?
July 10, 2020 @ 4:44 pm
I think AM-settlement is for SPX options rather than the SPX weeklies (SPXW) which are PM-settled. Maybe I’m misunderstanding?
July 10, 2020 @ 3:56 pm
How did the algorithm work on the 0 DTE? For instance, if you were looking for a 16D and it wasn’t available because of the high Gamma did you go out to the next expiration and look there up to the 3 DTE or was 3 DTE only for Fridays? Since you were only holding one position at a time, is it safe to assume you waited until near close on the next day to look for your next position?
On the 0 DTE, 16D and 30D what was your average premium collected?
July 11, 2020 @ 11:53 am
When looking for a 16D position, the tolerance is +/- 6 delta. So anywhere between 10-22, closest to 16. Tolerances are different for different delta targets.
The approach is to first look at DTE targets then look at a delta targets. If a 0DTE position with a delta between 10-22 doesn’t exist, then look at a 1DTE position with the a delta in the range and choosing the one closest to 16D. Repeat this process until all DTE targets within the range have been explored. If after all DTE positions have been explored and there is not a suitable position, take no action – a new position is not opened that day.
There are scenarios where more than one position is open at a time. For example, if on Friday only a 3DTE / Monday-expiring position satisfies the requirements, such a position is opened. Then on Monday the 0DTE same-day expiring positing satisfies the requirements, that position is opened. At this time there are now two open positions.
Avg premium collected is in the “Premium Capture“ chart and table in the results section.
July 14, 2020 @ 4:30 pm
I’m curious if the results would be similar using put credit spreads with the 0 DTE strategies. For someone with a small account this is more appealing to me and I’m wondering what the downsides of doing a spread would be opposed to just selling a put. Is this something you would look into in a future study?
July 18, 2020 @ 7:44 pm
Sure! I’ll add it to the list.
July 21, 2020 @ 2:55 pm
Hi. Awesome stuff! I was wondering if you could provide more context around the drawdown percentages. I want to make sure I understand this correctly and put a dollar amount to the drawdown.
Lets say the SPY is trading for 326. You are running a campaign, selling the 0 DTE, 16 Delta puts everyday. Would the notional value be $32,600 per put sold? Since the max drawdown for 0DTE, 16D is 9.36%, does this equate to a draw down of $3051.36 per option sold?
Thanks!
July 22, 2020 @ 1:06 pm
Yes, notional on a 326 SPY put would be $32,600.
Drawdowns are measured as a portfolio performance metric as opposed to an option position performance metric. That is, 9.36% max drawdown is the difference between the portfolio value at the bottom of the drawdown and portfolio value at the peak from which the portfolio fell.
There are many drawdowns as the portfolio ebbs and flows. 9.36% happened to be the largest drawdown in this example.
Because the drawdown is relative (i.e. a percentage) and not absolute (i.e. a specific dollar amount), it’s not possible to put a specific dollar amount to it given the data available. For example, a 10% drawdown would be viewed as more severe than an 8% drawdown. However, more dollars in an absolute sense could be lost on an 8% drawdown.
Suppose a 10% drawdown occurred early when the portfolio was, say, 10k which results in a 1k loss. The portfolio eventually recovers and grows to 100k then experiences an 8% drawdown. This results in an 8k loss – more dollars were lost but it represents a smaller percentage.
July 22, 2020 @ 5:21 pm
Thanks for the detailed reply. I’m trying to figure out how I would size this strategy. I guess a better question would have been, if notional value is 32,600, how many puts are you selling per 32,600 in your test? i.e. What is the leverage factor?
Sticking w/ the 0 DTE, 16 delta:
I see the minimum starting capital was 11,000. I’m assuming this minimum number is the margin required + a drawdown buffer that would allow you to keep trading. Is it safe to say this is 3x to 5x leverage? When would you add more contracts? every time the account increased by 11 k?
Is 11k the starting number that the CAGR was calculated on?
Thanks and sorry for all of the questions. Maybe I’m just having a dense day.
July 23, 2020 @ 11:38 am
Correct – assuming a start in Feb 16 2018, $11k was the minimum amount of capital needed to write a 0-3 DTE short put every day without blowing up [within the assumptions of the backtest].
Max margin utilization is essentially 100% or 5x leverage, whereas the average margin utilization is essentially 30% or 1.5x leverage. From time to time there would be 3 concurrent positions open. More often then not, there would be only 1-2 positions open at any given time with the 0-3 DTE strategy. This is why the max margin utilization and average margin utilization are so far apart for this particular strategy.
Yes, the CAGR was calculated on the 11k starting capital.
July 27, 2020 @ 12:15 am
I’m having trouble understanding your 45 DTE curves. What is the difference between the 5D-50 (red here) and 5D (purple)?
July 29, 2020 @ 5:11 pm
The 5D-50 is managed (closed) at “50% max profit or 21 DTE, whichever comes first” whereas the 5D is held till expiration.
April 29, 2021 @ 9:09 am
what about the 50D-25 ??
April 29, 2021 @ 9:15 am
It’s not in this comparison but it’s listed in detail at https://spintwig.com/spy-short-put-45-dte-leveraged-options-backtest/ and https://spintwig.com/spy-short-put-strategy-performance/
August 2, 2020 @ 5:28 pm
For 0DTE – 5D, is there a reason the premium capture is around 56% even with a 98.5% win-rate – does the 1.5% loss rate reduce the premium capture so significantly?
August 2, 2020 @ 5:57 pm
Yes, the 1.5% of trades that were losers offset nearly half of the profits earned from all the profitable trades.
August 4, 2020 @ 12:25 pm
I see “Timing 3:46pm ET” — does that mean for the 0 DTE strategy, the following statements are true?
On Friday, 3:46PM a short put is opened with a Monday expiry
On Monday, 3:46PM a short put is opened with a Wednesday expiry
On Tuesday, 3:46PM a short put is opened with a Wednesday expiry
On Wednesday, 3:46PM a short put is opened with a Friday expiry
etc…
Forgive me if I just missed it in your amazing writeup!
August 4, 2020 @ 12:26 pm
Oh man, the formatting did not come through, sorry!
August 6, 2020 @ 3:46 pm
No worries – it came through formatted when I received the email alert 🙂
For the 0 DTE strategy, a position is opened Mon @ 3:46pm with a Mon expiration (it’s essentially a 14-minute option, ignoring after-hours trading).
There are no Tuesday-expiration options so on Tues a position is opened 3:46pm and are generally a Wed expiration. I use tolerances on the delta and DTE targets to help ensure a position is opened daily. This mitigates much of the timing luck issue while also capturing the “intent” or “spirit” of the backtest.
Wed comes around and a new position is opened at 3:46pm for expiration in 14 min (and there’s also Tuesday’s position that’s expiring).
Suppose Friday comes around and there’s no position that can be opened within the specified delta target range. I allow up to 3 DTE of tolerance so the strategy can open a position that expires Monday. Also, various holidays and quadruple witching can force a non-same-day-expiring position to be opened.
The methodology you cited is BigERN’s strategy – I backtested that as a guest post on his site: https://earlyretirementnow.com/2020/06/17/passive-income-through-option-writing-part-5/
April 8, 2021 @ 6:46 pm
Not following the criteria for non-expiration days, ie: opening on Tuesday (since no expiration) for Wednesday expiration.
I can’t imagine you would be opening 16D/30D/50D trades on Tuesday at 3:46 for Wed EOD expiration. With 5x leverage a single sell off Wednesday morning would wipe out years of returns. Today, a 17D trade for Wednesday expiration for SPX is at 4075 (SPX closed at 4097.22). Even a 1% movement down (to 4056.25) would lead to an overnight loss of ~1,875.22 and that’s just from a 1% movement. Make the movement larger and the loss multiplies to 10k+ before you know it. If this is the case and somehow in the end the profits do end up being higher than losses, the bulk of the profit seems to come from the overnight trades rather than true 0 DTE expiration because a 16D trade for overnight is going to provide a significantly higher premium than a 16D trade for expiration in 15 minutes.
I’m also not exactly following how you can maximize margin utility to 100%. If you’re at Tuesday, you open a position for Wednesday expiration while using 100% margin you would have to close the position before 3:46 at potentially unfavorable prices to be able to maintain 100% margin utility.
Maybe I’m just dumb and don’t understand (very possible.)
April 9, 2021 @ 12:36 pm
The strategy seeks to open a position daily in order to mitigate timing luck. In doing so, not all positions are exactly 0 DTE (same-day expiration). For example, a position opened on Tuesday will be associated with a Wednesday expiration. Thus, the position will be 1 DTE.
Hindsight bias was used to identify the minimum amount of starting capital such that the max margin utilization attribute would not exceed 100%. Optimizing to maximize *average* margin utilization by tuning position size and trade timing at each individual trade is possible per the mechanics you mention re: exit existing position at 3:46pm but would be an even more egregious use of hindsight bias than optimizing for max margin utilization.
True. In practice one will not know what the future holds so it wouldn’t be advisable to run a strategy with a max (for average) margin utilization target of 100% lest there be a sell off.
August 8, 2020 @ 6:07 am
Hi Spintwig,
Thanks for the great work as always, really appreciated the insight. However, I suspect the outperformance could be due to the timing of the position opening – the last 14 minutes of the day could be more tranquil than other periods in the day.
Would it be possible to run the 0-DTE backtest by opening positions at the start of the trading day?
August 9, 2020 @ 11:32 am
Great point William! This is a fine example of timing luck potentially impacting results.
Short answer is unfortunately “not at this time.” It turns out my data sources only offer a single price snapshot for a given day. There are data sources that have 1-minute granularity but they’re expensive to acquire and crunch. Perhaps one day this will be a backtest configuration I can accommodate.
November 2, 2020 @ 10:50 pm
Does 25% profit apply to if it declines by a value of 25% profit as well too?
November 3, 2020 @ 4:21 am
Positions were not exited based on losses. An exit on a 25% decline in value would be synonymous to a 0.25x stop loss.
November 20, 2020 @ 7:35 am
Just came across this – thank you for the great work. I haven’t seen anyone really talk about this strategy or similar elsewhere (other than ERN blog). Is be interested to hear if you have any thoughts about the mechanism or an explanation for the success of the shorter Dte strategies?
I am somewhat new to options trading so forgive me if this makes little sense, but do you think it could have to do with the expansion in implied volatility during turbulent markets? Ie the time value of longer dated options rises far more than it does for shorter dated ones, causing bigger drawdowns and margin hits.
November 22, 2020 @ 10:26 am
Thanks for stopping by! I don’t have a definitive reason, but my speculation is that
1) the 0DTE play is less saturated and thus has less structural arb happening to keep prices exactly where they should be (as compared to, say, 30DTE or 7DTE horizons) and
2) if the trade goes “bad” in that realized vol exceeds implied vol, the amount of vol that can happen in a day is less than that of a week or 45DTE. Thus, losses are capped to a single day’s worst move. Yes, longe-dated options are priced efficiently with more premium to account for this and have a longer runway before the position goes ITM. However, if a substantial fat tail happens like Feb/March 2020 then the 0DTE options can only lose for a day and the next trade takes advantage of the now-significantly-different greeks.
January 4, 2021 @ 1:13 pm
Can similar results be applied to 0DTE 16Delta credit spreads? Or how they change?
January 6, 2021 @ 2:29 pm
That’s a good question. I haven’t yet looked at the viability of 0DTE spreads. It’s on the roadmap but remains a little ways away due to the QQQ 7DTE leveraged backtest that next, followed by a segment on client backtests that were approved to be published.
January 6, 2021 @ 2:42 pm
If I can help you somehow, it would be my pleasure.
January 7, 2021 @ 2:06 pm
Help me keep up with all the custom backtest requests so I can allocate more time to public-facing content 🙂
January 10, 2022 @ 6:33 pm
I’m kinda torn on what the reality is – the Tasty Trade program seems to be selling 45 DTE, and exiting at 21 DTE.
The data that I’ve seen between you and ERN indicates 0 DTE seems to be best in terms of return / volatility.
I’m leaning more towards you guys and selling as close to 0 DTE, bc it seems like you have the data while Tasty Trades will throw up some abstract chart that says theoretically what they think the option greeks do, without showing us the numbers to back up their back tests.
January 14, 2022 @ 9:27 am
There is a newer study that compares 7, 45, 90, 180 and 365 DTE (LEAPS) at https://spintwig.com/spx-short-put-7-365-dte-leaps-s1-signal-options-backtest/
Early management isn’t explored but it does compare all the durations from Jan 2007 through Oct 2021. This should help with the analysis. CAGR is greatest and annual vol is lowest for the unmanaged 7 DTE strats. I personally trade 0 DTE and BigERN does 2-3 DTE.
Agree that the tasty trade “research” is vague and lacking in details, has limited explanation of methodology, and no transparency (source data not readily available).
January 16, 2022 @ 3:38 pm
Thank you.
Question: when you are trading 0 DTE, are you doing daily, or are you following the S1 = True signal? I understand that daily seems to have a higher CAGR, but s1 = true seems to have lower vol, so I’m curious about your personal preference for your own program
January 17, 2022 @ 2:06 pm
When I’m trading, I trade most expiration days – namely M/W/F. Sometimes I sit out for a while. I sat out nearly all of Dec + the first week of Jan. Last week was profitable.
If I was doing longer durations I’d stick with s1, hands down. For 0 DTE specifically, the jury is still out. There is far less data for 0 DTE strats, between lack of intraday data (I only have a single price snapshot per day as opposed to 1-minute granularity) and lack of historical data (Wednesday and Monday-expiring SPX options didn’t exist until 2016).
I don’t trade longer durations because 1) it’s not a good fit for my trading style / personality (the human factor will get in the way too much), and 2) I have no desire or need to hold a leveraged position overnight and don’t want that kind of risk on the books.
September 8, 2022 @ 4:50 am
Any particular reason you don’t test deltas above 50? Wouldn’t that be useful?
September 8, 2022 @ 10:37 am
Good question. Strategy performance, when delta targets are above 50, are primarily driven by intrinsic value (i.e. value of the underlying). The higher the delta, the closer the PnL curve gets to that of holding long underlying (minus frictions).