In this post we’ll take a look at the backtest results of opening one SPY short put 7 DTE leveraged position each trading day from Jan 10 2007 through Jun 3 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 10 backtests in this study evaluating over 28,300 SPY short put 7 DTE leveraged trades.
Also, be sure to check out my guest post over on BigERN’s blog where I backtest his options strategy that mitigates sequence of returns risk.
Let’s dive in!
Systematically opening SPY short put 7 DTE leveraged positions was profitable no matter which strategy was selected.
All 30D and 50D strategies as well as 16D hold-till-expiration outperformed buy-and-hold SPY with regard to total return.
- Symbol: SPY
- Strategy: Short Put
- Days Till Expiration: 7 DTE +/- 4, closest to 7
- Start Date: 2007-01-10
- 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 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 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 arbitrarily set so that max margin utilization never exceeds 100%)
- Apply a 20% discount on displayed results. For example, if a strat depicts a CAGR of 10%, assume that it’ll yield 8% in practice. This is to account for hindsight bias being used when determining starting capital in the backtest.
- 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
Early management has minimal impact since positions are held for, on average, 3 days.
Early management yielded a lower average margin utilization across all strategies when compared to 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.
Early management had lower rates of premium capture vs holding till expiration.
The higher the delta the lower the premium capture.
Managing trades early outperformed holding till expiration with regard to win rate.
The higher the delta the lower the win rate.
Max Drawdown Duration
Average Trade Duration
Managing trades at 50% max profit yielded trade durations roughly half the duration of hold-till-expiration.
Compound Annual Growth Rate
Profit Spent on Commission
13.27% – the blended average percent of profits spent on commission across all option strategies.
Early management underperformed holding till expiration with regard to total P/L.
Higher delta strategies yielded greater total P/L than lower delta strategies.
All option strategies were profitable.
All 30D and 50D strategies as well as 16D hold-till-expiration outperformed buy-and-hold SPY with regard to both risk-adjusted and total return.
At face value it appears there may be some opportunities with 7 DTE options to outperform buy-and-hold SPY. Let me debunk those initial thoughts.
I’ve referenced timing luck – P/L variance associated with sheer luck – on several occasions. A material risk and P/L variance can be observed by simply changing the day in which a position is opened, closed or rolled.
For example, a single 45 DTE short put can have the following outcomes:
A popular backtest approach is to open a position then roll (close then reopen a new position). One can get very lucky or unlucky based on when the strategy was started. In fact, it’s possible to have 30 different return profiles – one for each day of the month in which the backtest was started. If you’re pushing a narrative, simply select the return profile that best matches your message and no one’s the wiser.
To mitigate this potential “lying with data” opportunity, two approaches exist: open a position daily which essentially eliminates timing luck or publish a portfolio variance statistic that provides a +/- standard deviation against reported performance. I do the former.
Great, so what does any of this have to do with the backtest results? Glad you asked. Let’s take a look at the number of occurrences by year.
Time in the Market
Looking at the 50D strategy, there were only 91 trades in 2007; monthlies was the only option product that existed at this time for SPY. Consequently, the backtest avoided most of the 2007 global financial crisis. By “luckily” not participating in the market during this time the strategy had a great leg up on the buy-and-hold approach.
The options strategy experienced more occurrences as new options products came to market. On June 4 2010 CBOE released Friday-expiring weekly options on SPY.
Due to the lack of product availability during the first few years of the study and thus the inability to execute the option strategy (daily trades of short DTE positions) for more than 5 trading days per month during and after the GFC, we are forced to accept a material amount of timing luck in the performance results; take these numbers with a grain of salt.
What if we start the study at a time when timing luck isn’t a material factor – i.e. after June 4 2010?
We end up with the following P/L curves:
It could be argued that this is an unfair backtest since it both skips the largest SPY drawdown in recent history and compares a limited-upside strategy (short puts) against the longest bull market in history.
This also doesn’t take into effect the differences in margin utilization associated with skipping the GFC.
What is a researcher to do?
I intend to measure from late Feb 2018 through June 2020. This captures the Dec 2018 vol spike, 2019 strong +30% rally, and the March 2020 COVID-19 drop which resulted in a VIX value greater than what was observed during the GFC. Also, late Feb 2018 is when CBOE released Monday-expiring weekly options on SPY (see SEC release 34-82733). This product release is what allows the strategy to ensure a position is opened each trading day while remaining true to the duration target.
Stay tuned for a study that compares ultra-short (0 DTE), short (7 DTE), and standard (45 DTE) SPY short put strategies against a buy/hold total-return portfolio of SPY.
Update: the comparison study is now live!
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