In this post we’ll take a look at the backtest results of opening one SPY short put 45 DTE leveraged position each trading day from January 3 2007 through July 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 40 backtests in this study evaluating over 75,300 SPY short put 45 DTE leveraged trades.
Let’s dive in!
Systematically opening 45 DTE leveraged short put positions on SPY was profitable no matter which strategy was selected.
Hindsight suggests that for risk-parity and total return outperformance vs buy-and-hold SPY, implement the 30D 25% max profit or 21 DTE leveraged short put strategy.
Hindsight suggests that for a smoother ride and total return outperformance vs buy-and-hold SPY, implement the 16D hold-till-expiration 45 DTE leveraged short put strategy.
- Symbol: SPY
- Strategy: Short Put
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-01-03
- End Date: 2019-07-26
- Positions opened per trade: 1
- Entry Days: daily
- Entry Signal: N/A
- Timing: 3:46pm ET
- Strike Selection
- 2.5 delta +/- 2 delta, closest to 2.5
- 5 delta +/- 2 delta, closest to 5
- 10 delta +/- 2.5 delta, closest to 10
- 16 delta +/- 3 delta, closest to 16
- 30 delta +/- 3.5 delta, closest to 30
- 50 delta +/- 4 delta, closest to 50
- Trade Entry
- 2.5D short put
- 5D short put
- 10D short put
- 16D short put
- 30D short put
- 50D short put
- 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
- 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
- Prices are in USD
- Prices are nominal (not adjusted for inflation)
- 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 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
- Starting capital for short option backtests is adjusted in $100 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 $100 increments such that max drawdown is between 80-100%, closest to 100%, of max drawdown target
- For comprehensive details, visit the methodology page
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.
Early management yielded a lower average margin utilization.
Hindsight bias was used in 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.
The higher the delta, the lower the premium capture.
Early management yielded lower rates of premium capture than holding till expiration.
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.
Volatility increases as delta increases.
Holding till expiration yielded lower volatility on the 50D strategies.
Early management improves average monthly returns in most scenarios.
The less risky the strategy the softer the best and worst months.
Managing at 75% max profit or expiration yielded the most severe drawdowns. Looking at the 10D strategy, there’s a 3.66x difference in max drawdown between managing at 25D & 21 DTE vs 75% & expiration.
Early management reduces the drawdown duration compared to holding till expiration. Managing at 75% max profit yielded the longest drawdown duration.
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
Managing trades early outperformed holding till expiration for the 30D and 50D strategies.
The 2.5D @ 50% max profit or 21 DTE strategy had the greatest risk-adjusted return.
Profit Spent on Commission
8.95% – the blended average percent of profits spent on commission across all option strategies.
Higher delta strategies yielded more profit than lower delta strategies.
Holding till expiration yielded greater profits than managing early on the 2.5D, 5D, 10D and 16D strategies.
All option strategies were profitable.
By applying leverage to the SPY short put 45 DTE trade one is able to generate total returns in excess of buy and hold. In contrast, the cash-secured SPY short put 45 DTE strategies were not able to achieve total returns in excess of buy-and-hold SPY.
While we’re talking about performance, let’s compare the Sharpe ratio between the leveraged and cash-secured strategies.
By applying leverage we experience a wider distribution of Sharpe ratios vs a cash-secured implementation.
Since SPY represents the market performance of the ~500 largest companies in the US, I hypothesize this phenomenon of wider Sharpe ratios for leveraged option strategies will manifest itself in backtests of other large-cap underlying.
The best news thus far is that the 16D hold-till-expiration strategy outperforms buy-and-hold SPY on both a risk-adjusted and total return basis AND the strategy is net profitable (not to be confused with USO, for example, which outperforms in both categories but is overall unprofitable). A runner up is the 30D 25% max profit or 21 DTE strategy, which matches risk-adjusted performance but outperforms on total return.
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