There are 40 backtests in this study evaluating over 123,000 SPY short vertical put spread trades.
In this post we’ll take a look at the backtest results of opening one SPY short vertical put spread each trading day from Jan 3 2007 through June 11 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.
Let’s dive in!
Systematically holding short vertical put spreads till expiration, as well as managing at 75% max profit was profitable across all tested delta targets.
The 10D/5D strategy held till expiration had the best risk-adjusted return of all short vertical put spread strategies.
If managing early, narrower spreads take longer to reach profit targets than wider spreads.
No SPY short vertical put spread strategy outperformed buy/hold SPY with regard to total return.
- Symbol: SPY
- Strategy: Short Vertical Put Spread
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-01-03
- End Date: 2019-06-11
- Positions opened per trade: 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 +/- 1.5 delta, closest to 10
- 16 delta +/- 1.5 delta, closest to 16
- 30 delta +/- 2.0 delta, closest to 30
- Trade Entry
- 5D short / 2.5D long
- 10D short / 2.5D long
- 10D short / 5D long
- 16D short / 2.5D long
- 16D short / 5D long
- 16D short / 10D long
- 30D short / 2.5D long
- 30D short / 5D long
- 30D short / 10D long
- 30D short / 16D long
- 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)
- 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
Managing trades at 50% max profit or 21 DTE underperformed holding till expiration with regard to win rate.
The lower the short delta position the higher the win rate.
The narrower the spread the lower the win rate.
Early management underperformed holding till expiration with regard to annual volatility. 5D-2.5D and 10D-2.5D @ 75% max profit were exceptions.
The higher the short position delta the higher the volatility.
Worst Monthly Return
Early management outperformed holding till expiration with regard to worst monthly return when the short delta position was 10 or less.
The higher the short position delta the more severe the worst monthly return.
Average P/L Per Day
Early management outperformed holding till expiration with regard to average daily P/L. The narrowest spread for each short delta target was an exception.
The higher the short delta position the higher the average daily P/L.
Average Trade Duration
Managing trades at 50D max profit or 21 DTE yielded trade durations roughly 66% shorter than holding till expiration.
Compound Annual Growth Rate
Managing trades early had mixed performance vs holding till expiration with regard to compound annual growth rate.
The higher the short delta position the higher the CAGR.
Early management underperformed holding till expiration with regard to sharpe ratio. The 30D short-leg trades were an exception.
The sharpe ratio was mixed across delta targets.
The 10D/5D hold-till-expiration strategy had the greatest risk-adjusted return among the option strategies.
Profit Spent on Commission
50.13% – the blended average percent of profits spent on commission across all short vertical put spread strategies.
Early management underperformed holding till expiration with regard to total P/L.
The higher the short position delta the higher the total P/L.
36 of the 40 option strategies were profitable.
Spreads were configured as a function of delta and not a fixed dollar width such as $1, $5 or $10. This allows for consistent risk profiles across the backtest duration.
Consider 2007 when SPY was $141 per share. A $5-wide spread allows for a 3.5% movement in the underlying ( 5 / 141 ). In 2019 the same $5-wide spread allows only a 1.73% movement in the underlying ( 5 / 288 ). It would require a strike width just north of $9 ( 262.5 / 0.035 ) to have a comparable present-day trade.
Of course, volatility – namely vega – plays a role in this as well. A $5 (or $9) wide spread can mean two very different things when VIX is 20+ vs 13.
By using delta to anchor short and long positions we can maintain risk profiles across varying VIX regimes and we are not impacted by any appreciation/depreciation of the underlying’s price.
When positions are closed before expiration a trader forfeits potential profits. In the process they shorten the time capital is at risk. Early management is essentially a form of risk management.
Suppose we open a 10-delta 44-DTE short put on SPY with a strike of 262.5 and collect $0.97. We have $26,250 at risk for 44 days.
Assuming we hold till expiration we have a return on capital of 0.37% ( 97 / 26,250 ) which is 3.11% [ ( 1 + .0037 ) ^ ( 365 / 44 ) – 1 ] annualized.
Let’s instead assume we close the short position after 1 day at 10% max profit.
Return on capital becomes 0.037% – just under 4 basis points – ( 9.7 / 26,250 ). Annualized, it becomes 14.43% [ ( 1 + ( 9.7 / 26250 ) ) ^ ( 365 / 1 ) – 1 ].
In this scenario, managing early increases annualized return on capital by over 4.6x.
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