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!

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

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)
• 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

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 🙂

Additional Resources

Custom Backtests

Have your ideas professionally backtested.

• trades ideas remain confidential
• backtest results remain unpublished
• deliverables include:
  • a master-results spreadsheet
  • raw trade logs and data sources
• most custom research is completed within 5 business days

Contact me for a quote.

Trade Logs

Visit the trade log store to download the trade logs associated with this and other published studies.

Thoughts? Feedback? Dedications? Shoutouts? Leave a message in the comments below!