SPY Short Straddle 45 DTE Options Backtest

4 min read

In this post we’ll take a look at the backtest results of opening one SPY short straddle each trading day from Jan 3 2007 through July 12 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 27 backtests in this study evaluating over 84,600 SPY short straddle trades.

Let’s dive in!

Summary

Systematically selling short straddles on SPY is profitable across all strategies.

SPY short straddles take longer to reach profit targets than SPY vertical put spreads or SPY short puts.

All SPY short straddle strategies underperformed buy-and-hold SPY with regard to total return.

Methodology

Strategy Details

• Symbol: SPY
• Strategy: Short Straddle
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2019-07-12
• Positions opened per trade: 1
• Entry Days: daily
• Entry Signal: N/A
• Timing: 3:46pm ET
• Strike Selection
  • Delta 50 +/- 3.5 delta, closest to 50
• Trade Entry
  • 50 delta (ATM) short put / 50 delta (ATM) short call
• Trade Exit
  • 10, 20, 30, 40 and 50% max profit or when DTE equals
    • 28, whichever occurs first
    • 21, whichever occurs first
    • 14, whichever occurs first
    • 7, whichever occurs first
  • 10, 20, 30, 40 and 50% max profit or expiration, whichever occurs first
  • 75% 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)
• All statistics are pre-tax, where applicable
• 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

Results

Win Rate

Across all holding durations, managing at 10% yielded the highest win rate.

When targeting 40% and 50% max profit, managing at 21 DTE yielded the highest win rates 

Holding till expiration yielded the lowest win rate.

Annual Volatility

Worst Monthly Return

Average P/L Per Day

Average Trade Duration

Earlier management results in shorter trade duration.

What’s interesting here is that by managing at 10% max profit or holding till expiration, trade duration was on average 16 days. With the average duration when holding to expiration being 43 days, this means we experience 37% of the duration risk for only 10% of the reward. Managing at 21 DTE improves this slightly to 30% of the duration risk for only 10% of the reward.

Straddles are particularly capital inefficient.

Compound Annual Growth Rate

Sharpe Ratio

Profit Spent on Commission

Each of the short straddle strategies generates 3134 trades. At two positions per strategy (short call + short put) the hold-till-expiration strategies generate $6,268 in commissions. For early management, double that to $12,536.

If we ignore commissions the P/L would be higher. Let’s see what percent of our gross profits were lost to commissions.

To identify the commission costs associated with strategies not bound by a duration we need to know how many positions went on to expire vs those that were managed at their respective profit target.

We also compare against Win Rate and calculate the percentage of trades that failed to meet profit targets, were held till expiration, and had a value between $.01 and the respective profit target.

18.09% of profits, on average, are spent on commissions across the short straddle strategy.

Total P/L

Again we see the 21 DTE duration and 30% profit target management strategies outperforming.

Relative to buy-and-hold SPY, the best strategies underperformed by over 60%.

Overall

How do the short straddle strategies compare to buy-and-hold SPY?

Systematically selling straddles was profitable across all strategies.

Positions managed at 28 DTE exhibited underperformance relative to the other time-based management strategies. This is due to the 28 DTE strategy experiencing the least amount of theta decay, increasing the impact of commission drag.

Similarly, managing at 10% max profit also exhibited significant underperformance relative to the other management profit targets due again to low revenue and the corresponding impact of commission drag.

Managing positions at 21 DTE yielded the best P/L per trade across all profit targets.

Discussion

Retail Broker Business Model

The straddle strategy is a great tool for retail brokers to pitch as it’s great for their bottom line.

Losses are relatively small which helps ensure clients don’t blow up their account. That is, they don’t lose their capital and can remain an active trader.

Meanwhile, the retail broker can expect to collect roughly 16% of all short straddle strategy profits by way of commissions.

Additional Resources

Private, Custom Backtests

Discover your edge with private, custom backtests for as little as 99 USD. Learn more or contact us for a quote.

Trade Logs

Visit the trade log store and download the data used in this and other backtests.

s1 signal

Trade S&P 500 options more efficiently using the s1 signal. Learn more.

s2 signal

Trade GLD options more efficiently using the s2 signal. Learn more.

s4 signal

Trade Russell 2000 options more efficiently using the s4 signal. Learn more.

mREIT Preferred Share Dashboard

High-yield, low-beta alternatives to cash or treasury bills. Learn more.

Consultations

Schedule a consultation to review your specific scenario and get direct answers to your questions.