SPY Short Put 0 DTE Cash-Secured Options Backtest

5 min read

In this post we’ll take a look at the backtest results of opening SPY short put 0 DTE cash-secured positions from January 3 2007 through September 26 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 10 backtests in this study evaluating over 11,500 SPY short put 0 DTE cash-secured trades.

Let’s dive in!

Summary

Systematically opening short put 0 DTE positions on SPY was profitable no matter which strategy was selected.

Non of the cash-secured SPY short put 0 DTE strategies outperformed SPY with regard to total return.

Methodology

Strategy Details

• Symbol: SPY
• Strategy: Short Put
• Days Till Expiration: 0 DTE +/- 3, closest to 0
• Start Date: 2007-01-03
• End Date: 2019-09-26
• 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 requirements are always satisfied
• Margin calls never occur
• 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
• Early assignment never occurs

Mechanics

• Prices are in USD
• Prices are nominal (not adjusted for inflation)
• All statistics are pre-tax, where applicable
• Margin collateral is held as cash and earns no interest
• Assignment P/L is calculated by closing the ITM position at 3:46pm ET the day of expiration / position exit
• Commission to open, close early, or expire ITM is 1.00 USD per contract
• Commission to expire worthless is 0.00 USD per contract
• Commission to open or close non-option positions, if applicable, is 0.00 USD
• Slippage is calculated according to the slippage table
• For comprehensive details, visit the methodology page

Results

Win Rate

Managing trades early improved the win rate.

The higher the delta the lower the win rate.

Annual Volatility

Worst Monthly Return

Average P/L Per Day

Average Trade Duration

In all but the 5D scenario, ample opportunities existed – even while targeting 0 DTE – to implement early management mechanics.

Compound Annual Growth Rate

Time in Market

The order entry mechanics allowed us to experience market exposure for about two thirds of the backtest duration. Due to the nature of 0 DTE options, 50D positions are less prevalent and therefore the 50D strategies experience less market exposure.

Not depicted in the chart and table above, the majority of the time spent out of the market was between January 3 2007 through June 4 2010. June 4 2010 is when weekly options on SPY were introduced.

Sharpe Ratio

Profit Spent on Commission

7.2% – the blended average percent of profits spent on commission across all short put strategies.

Total P/L

Early management outperformed holding till expiration with regard to total return.

The higher the delta the greater the total return.

Overall

All short put 0 DTE strategies were profitable.

Discussion

The combination of order-entry mechanics and available CBOE options products (monthlies until June 3 2010 then weeklies from June 4 2010 onward) caused the strategy to experience:

• ~67% of time in the market
• material amounts of timing luck (notice how the strategy glossed right over 2007-2009)

As highlighted in the methodology section, the “ultra short” 0 DTE strategy calls for options with 0-3 DTE horizons. 0 DTE would equate to a position opened and expiring same day whereas a 3 DTE position would equate to a position opened on Friday and closed on a Monday (Fri = 0 DTE, Sat = 1, Sun = 2, Mon = 3).

Prior to June 4 2010, only monthly options existed on SPY. Thus, the backtest was participating in the market for only ~2 days each month from Jan 2007 through June 4 2010. The backtest skipped right over the losses associated with the global financial crisis.

Additional Resources

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Trade Logs

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