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!

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.

Methodology

Strategy Details

• Symbol: SPY
• Strategy: Wheel
• Days Till Expiration: 45 +/- 17, closest to 45
• Start Date: 2007-01-03
• End Date: 2020-09-09
• Positions opened per day: 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
• Trade Exit
  • 50% max profit or expiration, whichever occurs first
  • Hold till expiration
• 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

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.

Additional Resources

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