In this post we’ll take a look at the backtest results of opening one SPY short put 45 DTE cash-secured position each trading day from Jan 3 2007 through Jul 31 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 54 backtests in this study evaluating over 170,500 SPY short put 45 DTE cash-secured trades.
Let’s dive in!
How to Trade Options Efficiently Mini-Series
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.
BTC – Bitcoin
C – Citigroup Inc.
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
EEM – MSCI Emerging Markets Index
GE – General Electric Company
GLD – SPDR Gold Trust
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.
QQQ – Nasdaq 100 Index
- QQQ Short Put 7 DTE Cash-Secured (coming soon)
- QQQ Short Put 7 DTE Leveraged (coming soon)
- 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.
TLT – Barclays 20+ Yr Treasury Bond
TSLA – Tesla, Inc.
USO – United States Oil Fund
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.
- Symbol: SPY
- Strategy: Short Put
- Start Date: 2007-01-03
- End Date: 2019-07-31
- Positions opened: 1
- Entry Days: every trading day
- 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
- 2.5 delta short put
- 5 delta short put
- 10 delta short put
- 16 delta short put
- 30 delta short put
- 50 delta short put
- Trade Exit
- 25% max profit or when DTE = 21, whichever occurs first
- 50% max profit or when DTE = 21, whichever occurs first
- 75% max profit or expiration, whichever occurs first
- 100% max profit or expiration, whichever occurs first
- 1x Stop Loss
- 2x Stop Loss
- 3x Stop Loss
- 4x Stop Loss
- 5x Stop Loss
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.
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 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.
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).
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 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
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.
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
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:
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.
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
This study seeks to measure the performance of opening SPY short put positions and will interpret the results from the lens of income generation relative to buy-and-hold SPY.
The utility of the short put strategy as a portfolio hedging tool or other use will not be discussed and is out of scope.
Closing less-risky positions at 75% of max profit or expiration yielded the highest win rate. As trades were opened closer to the money closing positions at 25% max profit or 21 DTE began to improve the win rate.
Managing at 50% max profit or 21 DTE generally decreased annual volatility. Implementing a 1x stop loss yielded the lowest volatility across all but the 2.5D strategies.
Worst Monthly Return
Position management tactics that avoided holding till expiration yielded softer worst months in all but the riskiest strategies.
In particular, managing the 2.5D, 5D, 10D and 16D strategies managed at 50% max profit or 21 DTE softened the worst month by 53.98%, 47.40%, 42.13% and 32.99% respectively.
Average P/L Per Day
Managing early yielded as much as a 333% improvement in capital efficiency when compared to holding till expiration.
Average Trade Duration
Lower delta positions reach profit targets or are stopped out sooner than higher risk trades.
Compound Annual Growth Rate
Early management improved CAGR in a few scenarios.
The 10D strategy managed at 50% max profit or 21 DTE had the best risk-adjusted return of all short put strategies.
Profit Spent on Commission
20.77% – the blended average percent of profits spent on commission across all short put strategies.
The riskier the trade the greater the P/L.
The riskier trades benefited from early management.
None of the 54 strategies outperformed a buy and hold SPY portfolio.
Through this study we can compare two risk management strategies, namely early management and stop losses.
The data suggests that, in general, risk management is effective at 30D and below. Positions opened at the money experienced modest improvement relative to managing lower-risk strategies.
It appears managing early, in general, outperforms using stop losses. It also appears, in general, using stop losses outperforms holding till expiration.
An opportunity that looked promising based on preliminary research involved taking a low-return, low volatility-trade strategy such as opening a daily 5 delta position then spiking capital allocation when VIX rises above 17.5 to take advantage of IV contraction by opening a single SPX short put 45 DTE and managing at 25% of 21 DTE.
This is easy to implement in OptionStack but unfortunately their data only goes as far back as 2011. ORATS on the other hand has the historic data but their tool doesn’t support this kind of mechanic. Bummer.
Systematically selling puts on SPY is a profitable endeavor, no matter the strategy chosen, for retail readers and retail brokers.
The 10D @ 50% max profit or 21 DTE short put strategy had the greatest Sharpe ratio of all the short put strategies.
No systematic short put strategy outperformed holding a comparable amount of SPY.
Thanks for reading 🙂
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