SPY Wheel 45 DTE Cash-Secured Options Backtest

7 min read

In this post we’ll take a look at the backtest results of running a SPY wheel 45 DTE cash-secured strategy each trading day from Jan 3 2007 through Sep 9 2020 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 10 backtests in this study evaluating over 13,000 SPY wheel 45 DTE cash-secured trades.

Let’s dive in!

Prior Research

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.

• AMZN Short Put 45 DTE Cash-Secured

BTC – Bitcoin

• BTC Long Day Trade

C – Citigroup Inc.

• C Short Put 45 DTE Cash-Secured

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

• DIS Short Put 0 DTE Cash-Secured
• DIS Short Put 45 DTE Cash-Secured

EEM – MSCI Emerging Markets Index

• EEM Short Put 45 DTE Cash-Secured
• EEM Short Put 45 DTE Leveraged

GE – General Electric Company

• GE Short Put 45 DTE Cash-Secured

GLD – SPDR Gold Trust

• GLD Short Put 45 DTE Cash-Secured
• GLD Short Put 45 DTE Leveraged

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.

• MU Short Put 45 DTE Cash-Secured

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.

• T Short Put 45 DTE Cash-Secured
• T Short Put 45 DTE Leveraged

TLT – Barclays 20+ Yr Treasury Bond

• TLT Short Put 45 DTE Cash-Secured
• TLT Short Put 45 DTE Leveraged

TSLA – Tesla, Inc.

• TSLA Short Put 45 DTE Cash-Secured

USO – United States Oil Fund

• USO Short Put 45 DTE Cash-Secured
• USO Short Put 45 DTE Leveraged
• USO Short Call 45 DTE Cash-Secured

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.

• VZ Short Put 45 DTE Cash-Secured
• VZ Short Put 45 DTE Leveraged

Other

• Cumulative Income: Investing in Preferred Shares

Methodology

Core Strategy

• Symbol SPY
• Strategy Wheel
• Start Date 2007-01-03
• End Date 2020-09-09
• Positions opened 1
• Entry Days every trading day in which entry criteria is satisfied
• 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
• Trade Exit
  • 50% max profit or expiration, whichever occurs first
  • Hold till expiration

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.

Calculating Returns

Returns are calculated by recording the profit or loss as positions are closed, if any, each day.

Margin Collateral

Portfolio capital is held in cash and earns daily interest at the prevailing 3-month treasury bill rate each day throughout the backtest. The Daily Treasury Yield Curve Rates at the US Department of The Treasury website lists the daily interest rates used in the backtest.

Days for which there are no interest rates available, such as weekends and bank holidays, utilize the last published interest rate. For example, Saturday January 6 2007 and Sunday January 7 2007 do not have interest rates published. The backtest utilizes the rates published on Friday January 5 2007 for both these days.

Calculating Margin Utilization

A running total of the P/L is measured each day and tracks the portfolio performance. Meanwhile, a running total of the notional exposure is measured each trading day and tracks the daily margin utilization.

Margin utilization is estimated as 20% of notional. For example, if there is $100,000 of notional exposure the margin requirement would be $20,000.

Determining Starting Capital

Short Option Strategies

Backtests are run using an arbitrary amount of starting capital to generate a max margin utilization value. Starting capital is then adjusted in $100 increments such that max margin utilization is between 99% and 100%.

To compare the option strategy against the benchmark, an equal starting capital is allocated to a hypothetical buy-and-hold total-return portfolio.

Long Option Strategies

Backtests are run using an arbitrary amount of starting capital to generate a max drawdown value. Starting capital is then adjusted in $100 increments such that max drawdown is between -99% and -100%

To compare the option strategy against the benchmark, an equal starting capital is allocated to a hypothetical buy-and-hold total-return portfolio.

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 in a compound fashion using the monthly values.

Margin

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.

Moneyness

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).

Commission

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

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

Inflation

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.

Starting Capital

This specifies the minimum portfolio size necessary to successfully execute the trading strategy from the beginning of the backtest.

Average Margin Utilization

Margin utilization ebbs and flows throughout the backtest. This averages the daily margin utilization values.

AVERAGE(daily margin utilization)

Max Margin Utilization

This is the highest recorded daily margin utilization value throughout the backtest. Starting capital is specified to ensure this value resides between 99-100%.

MAX( daily margin utilization )

Max Margin Utilization Date

This is the date in which the highest margin utilization occurs. The formula is an index-match statement to lookup and return the date value associated with the max margin utilization value.

INDEX( all trade dates, MATCH( max daily margin utilization ) )

Premium Capture

This is the percent of premium captured throughout the strategy.

SUM( premium received ) - SUM( options bought back ) - SUM ( losses from immediately selling assigned shares )

Win Rate

Trades that were closed at management targets (profit, DTE) as winners but became unprofitable due to commissions are still considered winning trades. This phenomenon is typically observed when managing 2.5D and 5D trades early.

( count of trades with positive P/L before commissions > 0 ) / count of all trades

Annual Volatility

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 )

Average Monthly Return

Identify the average monthly returns.

AVERAGE( monthly return values )

Best Monthly Return

Identify the largest value among the monthly returns.

MAX( monthly return values )

Worst Monthly Return

Identify the smallest value among the monthly returns.

MIN( monthly return values )

Max Drawdown

This measures the greatest peak-to-trough decline, described as a percentage of the portfolio’s end-of-day value (open positions / unrealized P/L is not factored into end-of-day P/L value).

MIN( daily drawdown values )

Drawdown Days

This measures, using nominal (non-inflation adjusted) dollars, the duration in days from the max drawdown trough to previous high.

If portfolio never returns to the high before the max drawdown, “No Recover” is displayed.

ABS( Date of Max Drawdown - Date of Recovery )

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:

Sharpe Ratio

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.

Total P/L

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

Scope

This study seeks to measure the performance of opening option positions and will interpret the results from the lens of income generation relative to buy-and-hold.

The utility or effectiveness of options as a hedging tool or other use will not be discussed and is out of scope.

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

Early management had mixed rates of premium capture vs holding till expiration.

Premium capture rates were mixed across delta targets.

Monthly Returns

Early management underperformed holding till expiration with regard to average monthly P/L. 10D was an exception.

Average monthly P/L performance was mixed across delta targets.

Also displayed is the best and worst monthly returns for each strategy.

Max Drawdown

Early management had mixed max drawdown performance vs holding till expiration.

Max drawdown performance was mixed across delta targets.

Average Trade Duration

Managing trades at 50% max profit or 21 DTE yielded trade durations less than half the duration of hold-till-expiration.

Compound Annual Growth Rate

Early management underperformed holding till expiration with regard to compound annual growth rates. 10D was an exception.

Compound annual growth rate performance was mixed across delta targets.

Annual Volatility

Early management underperformed holding till expiration with regard to annual volatility. 16D was an exception.

The higher the delta the higher the annual volatility. 30D was an exception for hold-till-expiration and 10D was an exception for early management.

Sharpe Ratio

Early management underperformed holding till expiration with regard to sharpe ratio. 10D was an exception.

Sharpe ratios were mixed across delta targets.

The 30D @ hold-till-expiration strategy had the greatest risk-adjusted return among the option strategies.

Profit Spent on Commission

4.96% – the average percent of profits spent on commission across profitable option strategies.

Total P/L

Early management underperformed holding till expiration with regard to total P/L. 10D was an exception.

Total profit and loss performance was mixed across delta targets.

Overall

All wheel strategies except 30D early management and 50D early management were 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 strategy outperformed the “single income” strategy of buy/hold on either a total or risk-adjusted return perspective. In fact, one strategy even went negative! 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.

Curves

A quick glance reveals the wheel (orange) spent several years in the covered call phase around the time of the GFC in 2008. In 2013 there was an upward move that exceeded IV and shifted the strategy to a cash-secured put (CSP) “cycle.” The sharp downward move in Feb/Mar of 2020 caused the CSP to cross into negative P/L territory and have shares put to the trader.

Win Rate

The short positions experienced a win rate in line with expectations.

The long underlying experienced 1252 trading days of market exposure.

Profit and Loss

The short puts were a drag on the strategy, courtesy of the Feb/Mar 2020 crash, that wiped out all the years of CSP profits and sent the strategy into negative P/L territory.

Performance

Short calls had the greatest risk-adjusted returns but produced the least total return.

Risk Characteristics

The wheel strategy yielded the shortest max drawdown duration.

When the CSP cycle experienced the large loss in Feb/Mar 2020 it shifted to long underlying and enjoyed a swift ride up. Meanwhile, with VIX at record levels, the 5D covered call never expired ITM.

50D Early Management Details

This strategy yielded not only a negative return, it actually went below zero.

Curves

A quick glance reveals that despite the bull market the short put and short call option strategies both lost money.

An anecdotal observation is that the transition between wheel cycles – CSP to covered call and back – were some of the worst times to transition between strategies. When a CSP expired ITM it was generally followed by an upward move that caused a loss on the covered call. When the covered call expired ITM is was generally followed by a decrease in IV which lowered the premium received on the subsequent CSP.

Win Rate

The 50D short puts experienced a greater win rate than expected for a 50D position.

The long underlying experienced 1031 trading days of market exposure and experienced a higher win rate than the 50D short calls.

Profit and Loss

Both the short put and short call had negative P/L. Only the long equity exposure had a positive P/L.

The short call single-handedly dragged the account to $0 and below.

Performance

The Average Monthly P/L stat is a bit misleading due some outsized numbers skewing the results as P/L bounced between positive and negative. I may change this stat to Median Monthly P/L in future studies or simply include both. Example: going from a $5 account value to a $270 value will depict a return in the 5000-6000% range and thus generate unintuitive or potentially-misleading values.

Risk Characteristics

Here we see one of the outsized monthly returns mentioned in the performance section above.

The long equity position had the shallowest max drawdown.

Timing Luck

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

Suppose a trader “A” started the wheel strategy at some arbitrary date after June 2010 (this is when SPY weeklies were introduced); 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.

Summary

Systematically running the SPY wheel 45 DTE cash-secured strategy was profitable across all strategies except 30D early management and 50D early management.

The 30D @ hold-till-expiration strategy had the greatest risk-adjusted return among the option strategies.

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

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

Thanks for reading 🙂

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