SPY Wheel 0 DTE Cash-Secured Options Backtest

6 min read

In this post we’ll take a look at the backtest results of running a SPY wheel 0 DTE cash-secured strategy each trading day from Mar 1 2018 through Jan 31 2021 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold SPY.

Backtest duration is limited due to the release date of Monday-expiring weekly options on SPY (see SEC release 34-82733).

Prior research suggests that early management doest not benefit SPY short put 0DTE cash-secured or SPY short put 0DTE leveraged strategies. Thus, this study will only look at strategies that hold option positions till expiration.

There are 5 backtests in this study evaluating over 3,200 SPY wheel 0 DTE cash-secured trades.

Let’s dive in!

Summary

Systematically running the SPY wheel 0 DTE cash-secured strategy was unprofitable across all strategies except 5D.

None of the wheel strategies outperformed buy-and-hold SPY with regard to total return.

Methodology

Strategy Details

• Symbol: SPY
• Strategy: Wheel
• Days Till Expiration: 0 DTE +/- 3, closest to 0
• Start Date: 2018-03-01
• End Date: 2021-01-31
• Positions opened per trade: 1
• Entry Days: wheel
• Entry Signal: N/A
• Timing 3:46pm ET
• Strike Selection
  • 5 delta +/- 4.5 delta, closest to 5
  • 10 delta +/- 5 delta, closest to 10
  • 16 delta +/- 6 delta, closest to 16
  • 30 delta +/- 8 delta, closest to 30
  • 50 delta +/- 8 delta, closest to 50
• Trade Entry
  • 5D short put or call
  • 10D short put or call
  • 16D short put or call
  • 30D short put or call
  • 50D short put or call
• Exit Logic: whichever occurs first
  • Exit Profit Target: N/A
  • Exit DTE: Expiration
  • Exit Hold Days: N/A
  • Exit Stop Loss: N/A
  • Exit Signal: N/A
• Max Margin Utilization Target (short option strats only): 20% | 1x leverage
• Max Drawdown Target: 99% | account value shall not go negative

Assumptions

• 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
• Margin requirement for short CALENDAR SPREAD positions is 20% of the short option (short option expires after the long option)
• Margin requirement for long CALENDAR SPREAD positions is the net cost of the spread (short option expires before the long option)
• Early assignment never occurs
• There is ample liquidity at all times
• Margin calls never occur (starting capital is arbitrarily set so that max margin utilization never exceeds 100%)
• Apply a 20% discount on displayed results. For example, if a strat depicts a CAGR of 10%, assume that it’ll yield 8% in practice. This is to account for hindsight bias being used when determining starting capital in the backtest.

Mechanics

• Prices are in USD
• Prices are nominal (not adjusted for inflation)
• All statistics are pre-tax, where applicable
• Margin collateral is invested in 3mo US treasuries and earns interest daily
• Assignment P/L is calculated by closing the ITM position at 3:46pm ET the day of position exit if managed early or 4:00pm if held till expiration
• Commission to open, close early, or expire ITM is 1.00 USD per non-index underlying (eg: SPY, AAPL, etc.) contract
• Commission to open, close early, or expire ITM is 1.32 USD per index underlying (eg: SPX, RUT) contract
• Commission to expire worthless is 0.00 USD per contract (non-index and index)
• Commission to open or close non-option positions, if applicable, is 0.00 USD
• Slippage is calculated according to the slippage table
• Starting capital for short option backtests is adjusted in $1000 increments such that max margin utilization is between 80-100%, closest to 100%, of max margin utilization target
• Starting capital for long option backtests is adjusted in $1000 increments such that max drawdown is between 80-100%, closest to 100%, of max drawdown target
• Positions that have an exit date beyond the backtest end date are excluded
• For comprehensive details, visit the methodology page

Results

Starting Capital

Starting capital was held constant across all strategies and is equal to 100 shares of the underlying at the closing price on the backtest start date.

Premium Capture

Premium capture was mixed across delta targets.

Monthly Returns

Max Drawdown

Average Trade Duration

Short calls and short puts were 0-3DTE positions and held till expiration.

Compound Annual Growth Rate

Annual Volatility

Sharpe Ratio

Profit Spent on Commission

46.17% – the average percent of profits spent on commission across profitable option strategies.

Total P/L

Total profit and loss was mixed across delta targets.

Overall

One of the SPY Wheel 0DTE strategies was profitable.

Discussion

The “Wheel” is a three-part option strategy that involves:

1. Selling cash-secured puts on an underlying.
2. If/when one gets put shares, hold the long shares and sell covered calls against them.
3. If/when one’s shares get called away, return to selling cash-secured puts.

Often dubbed as the “triple income” strategy, the idea is that a trader receives income from the short put premium, experiences capital appreciation and/or receipt of dividends on the long underlying, and receives income from the short call premium.

Despite the promise of three revenue streams and the promise of lower volatility associated with options strategies, not a single wheel strategy outperformed the “single income” strategy of buy/hold with regard to total or risk-adjusted return.

Let’s take a look under the hood to see what’s happening.

5D Hold Till Expiration Details

This strategy yielded the greatest total return among the SPY wheel 0 DTE cash-secured strategies.

Curves

The volatility in mid-to-late Dec of 2018 was enough to have shares put to the trader, have the shares almost immediately called away before recovering, and return the strategy to the short put “cycle.” This is whipsaw at its finest.

Win Rate

The short put and short call positions both experienced a win rate roughly in line with expectations.

The long underlying experienced 380 trading days of market exposure.

Profit and Loss

The short puts contributed roughly 76% ( 1.51 / 1.99 ) to the bottom line with the short calls contributing about 84% ( 1.68 / 1.99 ). Long SPY was responsible for -60%.

Both option segments of the wheel were profitable. The equity segment was unprofitable.

Performance

Risk Characteristics

16D Hold Till Expiration Details

This strategy yielded the least total return among the SPY wheel 0 DTE cash-secured strategies.

Curves

Similar to the 5D instance, the volatility in mid-to-late Dec of 2018 was enough to have shares put to the trader, have the shares almost immediately called away before recovering, and return the strategy to the short put “cycle.” This occurred again in with the Feb/Mar 2020 volatility.

Win Rate

The short put positions experienced a win rate above expectations and the short call positions experienced a win rate roughly in line with expectations.

The long underlying experienced 183 trading days of market exposure.

Profit and Loss

The short put segment of the wheel was profitable. The short call and long equity segments were unprofitable.

Performance

Risk Characteristics

Timing Luck

Timing luck has a material influence over the wheel strategy. Consider the following hypothetical 45 DTE cash-secured put trade:

Suppose a trader “A” started the wheel strategy at some arbitrary date; their trade is represented by the red line. A week later trader “B” started the wheel strategy, represented by the yellow line, and opens a similar 45 DTE position with an expiration date 1 week later than trader “A” . Trader “C” started the wheel strategy a week after trader “B” and is represented by the green line.

Trader A and B will have shares of SPY put to them come expiration and their implementation of the wheel will transition to covered calls. Meanwhile, trader C will have a profitable CSP and their implementation of the wheel will remain in the CSP cycle. These nuances, summed over the span of a multi-year implementation, will yield different strategy results despite the strategy being mechanically identical.

This effect generally becomes more pronounced the longer the expiration cycle (read: longer DTE) and less pronounced the shorter the expiration cycle (shorter DTE).

Additional Resources

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