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!
Systematically selling puts on SPY was profitable across all delta targets.
The 10D @ 50% max profit or 21 DTE short put strategy had the greatest Sharpe ratio of all the short put strategies.
No option strategy outperformed buy-and-hold SPY with regard to total return.
- Symbol: SPY
- Strategy: Short Put
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-01-03
- End Date: 2019-07-31
- 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
- 2.5 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
- Max Margin Utilization Target (short option strats only): 20% | 1x 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 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
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 delta positions.
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 higher the delta the greater the total return.
None of the 54 strategies outperformed a buy and hold SPY with regard to total return.
Through this study we can compare two risk management strategies, namely early management and stop losses.
It appears that managing positions early, in general, outperforms using stop losses. It also appears that using stop losses, in general, outperforms holding till expiration.
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