In this post we’ll take a look at the backtest results of opening one SPY short strangle each trading day from Jan 3 2007 through July 19 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 20 backtests in this study evaluating over 62,000 SPY short strangle trades.
Let’s dive in!
Systematically selling SPY short strangles is profitable across all delta targets.
None of the short strangle strategies outperformed buy-and-hold SPY with regard to total return.
- Symbol: SPY
- Strategy: Short Strangle
- Days till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-01-03
- End Date: 2019-07-19
- Positions opened per day: 1
- Entry Days: daily
- Entry Signal: N/A
- Timing: 3:46pm ET
- Strike Selection
- 2.5 delta +/- 1.5 delta, closest to 2.5
- 5 delta +/- 1.5 delta, closest to 5
- 10 delta +/- 2 delta, closest to 10
- 16 delta +/- 3 delta, closest to 16
- 30 delta +/- 3 delta, closest to 30
- Trade Entry
- 2.5 delta short put / 2.5 delta short call
- 5 delta short put / 5 delta short call
- 10 delta short put / 10 delta short call
- 16 delta short put / 16 delta short call
- 30 delta short put / 30 delta short call
- Trade Exit
- 25% max profit or 21 DTE, whichever occurs first
- 50% max profit or 21 DTE, whichever occurs first
- 75% max profit or expiration, whichever occurs first
- Hold till expiration
- 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)
- 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
Trades that were closed at profit targets but became unprofitable due to commissions are considered non-winners for the purposes of this calculation.
The higher the delta the lower the win rate.
For the low-risk (2.5D, 5D) trades:
- Managing at 75% max profit is the optimal approach for maximizing win rate
- By managing at 75% the strategy avoided the sharpest market moves that hold-till-expiration experienced, eeking out a slight improvement.
- 25% underperformed due to profitable trades being closed for a loss after commissions.
- 50% underperformed 25% due to more winning trades turning into losers relative to 25% while having the same commission drag that forced several of the early trades to be unprofitable after closing.
Managing at 50% max profit or 21 DTE had the worst win rate at each delta target.
Worst Monthly Return
Average P/L Per Day
Average Trade Duration
Earlier management results in shorter trade duration.
Lower-delta positions reach profit targets faster than higher-delta positions.
Compound Annual Growth Rate
Profit Spent on Commission
In the best-case scenario with no early management we forfeit nearly 11% of our profits just for showing up.
Implementing early management yields lower portfolio volatility (20-34% lower) and lower max drawdowns (35-60% softer worst month) but lowers profits by 6.39% to 30.45%.
The higher the delta the higher the total P/L.
As delta increases, commissions represent a smaller proportion of credit received. Thus, the difference in total P/L between managing early and holding till expiration begins to narrow.
Systematically selling strangles was profitable across all strategies.
All short strangle strategies underperformed buy-and-hold SPY with regard to total return.
Retail Broker Business Model
Short strangle strategies are a great tool for retail brokers to pitch as it’s great for their bottom line.
The are net positive which helps ensure clients don’t blow up their account. That is, retail traders can grow their capital and subsequently increase their trading activity.
Meanwhile, retail brokers can expect to collect roughly 35% of all short strangle profits by way of commissions.
Private, Custom Backtests
Visit the trade log store to download the data used in this and other backtests.
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