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!
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
- QQQ Short Put 7 DTE Leveraged
- 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 Straddle
- Start Date 2007-01-03
- End Date 2019-07-12
- Positions opened 1
- Entry Days every trading day
- Timing 4pm ET (EOD pricing)
- 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
- 10, 20, 30, 40 and 50% max profit or when DTE equals
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 short straddle positions and will interpret the results from the lens of income generation relative to buy-and-hold SPY.
The utility of the short straddle strategy as a portfolio hedging tool or other use will not be discussed and is out of scope.
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.
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
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.
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%.
How do the short straddle strategies compare to buy-and-hold SPY?
Systematically selling straddles was profitable no matter the strategy used.
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.
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.
After enough of these backtest studies I’ll be able to build a retail broker revenue guide / cheat sheet that lists estimated revenue streams for the major options strategies.
Systematically selling short straddles on SPY is profitable for retail traders and retail brokers.
All short straddle strategies were profitable after commissions.
All short straddle strategies underperformed buy-and-hold SPY.
The 21 DTE short straddle strategies had the greatest risk-adjusted returns.
Thanks for reading 🙂
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