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!

Prior Research

AAPL – Apple Inc.

• AAPL Short Put 0 DTE Cash-Secured
• AAPL Short Put 45 DTE Cash-Secured
• AAPL Short Put 45 DTE Leveraged
• AAPL Long Day Trade

AMZN – Amazon.com, Inc.

• AMZN Short Put 45 DTE Cash-Secured

BTC – Bitcoin

• BTC Long Day Trade

C – Citigroup Inc.

• C Short Put 45 DTE Cash-Secured

DIA – SPDR Dow Jones Industrial Average

• DIA Short Put 7 DTE Cash-Secured (coming soon)
• DIA Short Put 7 DTE Leveraged (coming soon)
• DIA Short Put 45 DTE Cash-Secured (coming soon)
• DIA Short Put 45 DTE Leveraged (coming soon)

DIS – Walt Disney Co

• DIS Short Put 0 DTE Cash-Secured
• DIS Short Put 45 DTE Cash-Secured

EEM – MSCI Emerging Markets Index

• EEM Short Put 45 DTE Cash-Secured
• EEM Short Put 45 DTE Leveraged

GE – General Electric Company

• GE Short Put 45 DTE Cash-Secured

GLD – SPDR Gold Trust

• GLD Short Put 45 DTE Cash-Secured
• GLD Short Put 45 DTE Leveraged

IWM – Russel 2000 Index

• IWM Short Put 7 DTE Cash-Secured
• IWM Short Put 7 DTE Leveraged
• IWM Short Put 45 DTE Cash-Secured
• IWM Short Put 45 DTE Leveraged
• IWM Long Day Trade

MU – Micron Technology, Inc.

• MU Short Put 45 DTE Cash-Secured

QQQ – Nasdaq 100 Index

• QQQ Short Put 7 DTE Cash-Secured
• QQQ Short Put 7 DTE Leveraged
• QQQ Short Put 45 DTE Cash-Secured
• QQQ Short Put 45 DTE Leveraged

SLV – iShares Silver Trust

• SLV Short Put 45 DTE Cash-Secured
• SLV Short Put 45 DTE Leveraged (coming soon)

SPY – S&P 500 Index

• SPY Long Put 45 DTE Optimal Hedging
• SPY Long Call 45 DTE
• SPY Long Call 730 DTE LEAPS
• SPY Short Put 0 DTE Cash-Secured
• SPY Short Put 0 DTE Leveraged
• SPY Short Put 0, 7, 45 DTE Leveraged Comparison
• SPY Short Put 2-3 DTE M,W,F “BigERN Strategy” (guest post)
• SPY Short Put 7 DTE Cash-Secured (coming soon)
• SPY Short Put 7 DTE Leveraged
• SPY Short Put 45 DTE Cash-Secured
• SPY Short Put 45 DTE Leveraged
• SPY Short Put 45 DTE Leveraged binned by IVR (coming soon)
• SPY Short Vertical Put Spread 0 DTE (coming soon)
• SPY Short Vertical Put Spread 45 DTE
• SPY Short Call 0 DTE Cash-Secured
• SPY Short Call 0 DTE Leveraged
• SPY Short Call 45 DTE Cash-Secured
• SPY Short Call 45 DTE Leveraged
• SPY Short Straddle 45 DTE
• SPY Short Strangle 45 DTE
• SPY Short Iron Condor 45 DTE
• SPY Wheel 45DTE
• Making Money in Your Sleep: A Look at Overnight Returns
• A Bad Case of the Fridays: A Look at Daily Market Returns

T – AT&T Inc.

• T Short Put 45 DTE Cash-Secured
• T Short Put 45 DTE Leveraged

TLT – Barclays 20+ Yr Treasury Bond

• TLT Short Put 45 DTE Cash-Secured
• TLT Short Put 45 DTE Leveraged

TSLA – Tesla, Inc.

• TSLA Short Put 45 DTE Cash-Secured

USO – United States Oil Fund

• USO Short Put 45 DTE Cash-Secured
• USO Short Put 45 DTE Leveraged
• USO Short Call 45 DTE Cash-Secured

VXX – S&P 500 VIX Short-Term Futures

• VXX Short Call 45 DTE Cash-Secured
• VXX Short Call 45 DTE Leveraged
• VXX Short Vertical Call Spread 45 DTE

VZ – Verizon Communications Inc.

• VZ Short Put 45 DTE Cash-Secured
• VZ Short Put 45 DTE Leveraged

Other

• Cumulative Income: Investing in Preferred Shares

Methodology

Core Strategy

• Symbol SPY
• Strategy Short Put
• Start Date 2007-01-03
• End Date 2019-09-26
• Positions opened 1
• Entry Days every trading day in which entry criteria is satisfied
• 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

Days Till Expiration

Some studies look at ultra-short-duration option strategies while others explore longer durations. The nuances and range for each approach are summarized below.

0 DTE Strategies

Between 0 and 3, closest to 0.

The range is up to 3 days from expiration for two reasons: to allow opening positions on Friday that have a Monday expiration and to allow more opportunities for occurrences of strategies focused in the 10-40 delta range. As expiration nears, it becomes increasingly difficult to open positions in this range.

This visual from Options Playbook does a great job illustrating the concept. Notice how at 1 DTE delta jumps from .50 to .10 with a single dollar change in the underlying. Compare this to the 60 DTE scenario where the change in delta for a $1 change in underlying is much smaller. By allowing positions to be opened as far out as 3 DTE, delta sensitivity to $1 differences in strikes becomes muted.

7 DTE Strategies

Between 3 and 11, closest to 7.

The range is 4 days either side of 7 to ensure a position can be opened each trading day while remaining true to the duration target. For example, opening a position Wednesday will have either a 2 DTE horizon (next Friday) or a 9-DTE horizon (the Friday after next). In this scenario the 9-DTE position would be selected.

45 DTE Strategies

Between 28 and 62, closest to 45.

The range is 17 days either side of 45 to account for quadruple witching. As the end of each calendar quarter approaches, namely during the last 7-10 days of Mar, Jun, Sep and Dec, the expiration dates of option contracts widen significantly.

730 DTE Strategies (LEAPS)

Between 550 and 910, closest to 730.

The range is 180 days either side of 730 to account for underlying that have LEAPS expirations in 6-month increments.

Calculating Returns

Returns are calculated daily using notional returns. The change in daily values of the option is divided by the stock price at the time of order entry.

The formula for daily return is:

option profit / opening stock price.

For example, suppose we opened a XYZ short put at $1.10 on 1/3/2007 with a stock price of $50:

• On 1/4/2007, our option increased to $1.50. The notional daily return calculation would be ( $1.10 – $1.50 ) / $50 = -.008 which is -.8% daily return on 1/4/2007
• On 1/5/2007 our option decreased to $0.80. The notional daily return calculation would be ( $1.10 – $0.80 ) / $50 = .006 which is .6% daily return on 1/5/2007

By using notional returns on daily stock values when calculating returns we isolate the performance of the option strategy from the effects of leverage. This allows us to identify strategy performance in a non-margin context such as in a US-based retirement account.

By measuring strategy performance as a daily percentage change we abstract the strategy performance from absolute dollar gain/loss to a relative percentage value. This is a fancy way of saying the strategy becomes capital agnostic. In other words, think of an ETF that executes the respective option strategy. We can allocate $100 to the “option ETF” and $100 to the underlying and have an apples-to-apples, dollar-for-dollar comparison.

Monthly and Annual Returns

To identify the monthly and/or annual returns for an option strategy, the respective daily returns are summed.

Graphing Underlying and Option Curves

The underlying position derives its monthly performance values from Portfolio Visualizer. Portfolio returns are calculated in a compound fashion using this monthly data.

Option strategies derive monthly performance values from the backtesting tool by summing the respective daily returns. Portfolio returns are calculated using the following formula:

( backtest starting capital * monthly return ) + portfolio balance

Margin

Margin requirements and margin calls are assumed to always be satisfied and never occur, respectively.

In practice the option strategy may experience varied performance, particularly during high-volatility periods, than what’s depicted. Margin requirements may prevent the portfolio from sustaining the number of concurrent open positions the strategy demands.

Moneyness

Positions that become ITM during the life of the trade are assumed to never experience early assignment.

In practice early assignment may impact performance positively (assigned then position experiences greater losses) or negatively (assigned then position recovers).

Commission

The following commission structure is used throughout the backtest:

• 1 USD, all in, per contract:
  • to open
  • to close early
  • expired ITM
• 0 USD, all in, per contract expired OTM / worthless

While these costs are competitive at the time of writing, trade commissions were significantly more expensive in the late 2000s and early 2010s.

In practice strategy performance may be lower than what’s depicted due to elevated trading fees in the earlier years of the backtest.

Slippage

Slippage is factored into all trade execution prices accordingly:

• Buy: Bid + (Ask – Bid) * slippage%
• Sell: Ask – (Ask – Bid) * slippage%

The following table outlines the slippage values used and example calculations:

• A slippage % of .50 = midpoint
• A slippage % of 1.00 = market maker’s price

Inflation

All values depicted are in nominal dollars. In other words, values shown are not adjusted for inflation.

In practice this may influence calculations that are anchored to a particular value in time such as the last “peak” when calculating drawdown days.

Calculating Strategy Statistics

Automated backtesters are generally great tools for generating trade logs but dismal tools to generate statistics. Therefore, I build all strategy performance statistics directly from the trade logs. Below is a breakdown on how I calculate each stat and the associated formula behind the calculation.

Win Rate

Trades that were closed at management targets (profit, DTE) as winners but became unprofitable due to commissions are considered non-winning trades. This phenomenon is typically observed when managing 2.5D and 5D trades early.

( count of trades with P/L > 0 ) / count of all trades

Annual Volatility

The standard deviation of all the monthly returns are calculated then multiplied the by the square root of 12.

STDEV.S(monthly return values) * SQRT(12)

Worst Monthly Return

Identify the smallest value among the monthly returns:

MIN(monthly return values)

Average P/L per Day

This measures changes in capital efficiency due to early management.

( average P/L per trade ) / average trade duration

Average Trade Duration

This measures the average number of days each position remains open, rounded to the nearest whole day.

ROUND ( AVERAGE ( trade duration values ) , 0 )

Compound Annual Growth Rate

This measures the compounded annual rate of return, sometimes referred to as the geometric return. The following formula is used:

Sharpe Ratio

Total P/L alone is not enough to determine whether a strategy outperforms. To get the complete picture, volatility must be taken into account. By dividing the compound annual growth rate by the volatility we identify the risk-adjusted return, known as the Sharpe ratio.

strategy CAGR / strategy volatility

Profit Spent on Commission

The following formula is used to calculate the percent of profits spent on commissions:

If a strategy is depicted as having percent greater than 100, this means the strategy is unprofitable due to commissions but would have been profitable if trades were commission free throughout the duration of the backtest.

If a strategy is depicted as “unprofitable” this means the strategy lost money even if trades were commission free throughout the duration of the backtest.

Total P/L

How much money is in the portfolio after the study? This stat answers that question and depicts it as a %

( portfolio end value / portfolio start value ) - 1

Scope

This study seeks to measure the performance of opening short put 0 DTE positions and will interpret the results from the lens of income generation relative to buy-and-hold.

The utility of the short put strategy as a portfolio hedging tool or other use will not be discussed and is out of scope.

Results

Win Rate

Managing trades early improved the win rate.

The riskier the trade the lower the win rate.

Annual Volatility

Worst Monthly Return

Average P/L Per Day

Average Trade Duration

Managing trades at 50% max profit or 21 DTE improved the efficiency of capital.

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

Higher delta strategies yielded more profit than lower delta strategies.

Managing positions early yielded more profit than holding positions till expiration.

Overall

All short put 0 DTE strategies were profitable.

Discussion

You may have noticed the new “Time in Market” statistic in the results section above. All studies to date have focused on 45 DTE strategies with few order-entry requirements. This causes these strategies to experience ~99% time in the market throughout the duration of the backtest. By adjusting the order-entry requirements to, say, only open 0 DTE positions, strategies can experience materially less than ~99% time in the market. Choosing to not swing at every pitch, or more quantitatively speaking, implementing a strategy that, by design, experiences less than 100% time in the market can yield some interesting outcomes.

For example, notice how the option strategy performance curves don’t experience significant losses during the Great Recession. This is in part due to the short duration of the strategies – SPY generally can only fall “so much” in the span of a day (I’m ignoring flash crashes and extreme single-day events such as 9/11). More importantly though, it’s because the strategy wasn’t participating in the market for ~29 out of 30 days of each month. It’s not until weekly options on SPY were introduced did the strategy begin to experience increased time in the market.

Another interesting outcome involves timing luck. I won’t spend much time on the topic here but you can click the link to check out my previous discussion on the topic, complete with a picture and reference SSRN research paper.

Summary

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

All cash-secured SPY short put 0 DTE strategies outperformed buy-and-hold SPY on a risk-adjusted basis and underperformed on a total return basis.

The 10D @ 50% Max Profit or Expiration had the greatest risk-adjusted return among the option strategies.

Thanks for reading 🙂

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