SPY Wheel 7 DTE Cash-Secured Options Backtest

In this post we’ll take a look at the backtest results of running a SPY wheel 7 DTE cash-secured strategy each trading day from Jun 4 2010 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 Friday-expiring weekly options on SPY.
Prior research suggests that early management doest not benefit SPY short put 7DTE strategies. Thus, this study will only look at strategies that hold option positions till expiration.
There are 5 backtests in this study evaluating over 6,500 SPY wheel 7 DTE cash-secured trades.
Let’s dive in!
Contents
Summary
Systematically running the SPY wheel 7 DTE cash-secured strategy was profitable across all strategies.
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: 7 DTE +/- 4, closest to 7
- Start Date: 2010-06-04
- 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% | cash secured
- Max Drawdown Target: 99% | account value shall not go negative
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 rates declined as delta increased. 30D is an exception.
Monthly Returns
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Max Drawdown
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Average Trade Duration

Short calls and short puts were 7DTE positions and held till expiration.
Compound Annual Growth Rate
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Annual Volatility
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Sharpe Ratio
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Profit Spent on Commission


5.57% – the average percent of profits spent on commission across profitable option strategies.
Total P/L


Total profit and loss performance was mixed across delta targets.
Overall
All wheel strategies were profitable.
Discussion
The “Wheel” is a three-part option strategy that involves:
- Selling cash-secured puts on an underlying.
- If/when one gets put shares, hold the long shares and sell covered calls against them.
- 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.
10D Hold Till Expiration Details
This strategy yielded the greatest total return among the SPY wheel 7 DTE cash-secured strategies.
Curves
A quick glance reveals the wheel (orange) spent the majority of the backtest duration in the short put “cycle.” There were a few downward moves that exceeded IV and shifted the strategy to a covered call (CC) “cycle.”
The sharp downward move in Feb/Mar of 2020 started with a relatively modest loss on the short puts. Once SPY shares were put to the trader, the long SPY position got hammered; selling covered calls offered a negligible cushion.
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 691 trading days of market exposure.
Profit and Loss
The short puts contributed roughly 27% ( 36.24 / 132.16 ) to the bottom line with long SPY contributing about 70% ( 91.78 / 132.16 ). The remaining 3% was courtesy of the short calls.
Every segment of the wheel was independently profitable.
Performance
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Risk Characteristics
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5D Hold Till Expiration Details
This strategy yielded the least total return among the SPY wheel 7 DTE cash-secured strategies.
Curves
A quick glance reveals the SPY wheel 7 DTE 5D strategy had virtually all of its returns wiped out not once, but twice, over 10 years. In each scenario, recovery was only possible due to timing luck keeping the strategy “cycle” in the covered call phase. In other words, buy and hold is what allowed the major losses to recover.
The majority of strategy total return is attributable to the long SPY position. The option strategies have a nominal yet-still-measurable influence.
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 680 trading days of market exposure.
Profit and Loss
The short puts contributed roughly 19% ( 15.21 / 82.18 ) to the bottom line with long SPY contributing about 74% ( 60.48 / 82.18 ). The remaining 7% was courtesy of the short calls.
Every segment of the wheel was independently profitable.
Performance
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Risk Characteristics
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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).
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July 13, 2021 @ 9:44 am
Very glad to see the follow up that was requested in the prior SPY backtest in January.
Can you clarify if this is reinvesting the premium that is successfully collected?
The primary attractiveness of this strategy is the accelerated compounding benefits of collecting multiple percentages of premium in very short time periods, for example ~1-4% in one week’s time. Many wealth generating charts make assumptions of 5% over one YEAR’s time, across 40-60 years, while this strategy does something similar in one week or one month with the proper selection of medium volatility or slightly higher premium option’s contracts. As such, despite drawdowns and attempting to learn the most probable time of exiting the trade before expiration, this should still have compounding growth (and greater portfolio volatility). Whereas the buy and hold strategy of the underlying SPY does not introduce new capital except potentially from the ETF’s management team reinvesting dividends.
Thoughts?
Theta FAANG
July 18, 2021 @ 8:19 pm
There is not enough premium received over the life of the backtest to purchase an additional 100 shares of SPY and open an additional option contract. Thus, reinvestment is not possible.
At the same token, 69% of the strategy returns are attributable to the long SPY position. The rate of growth of SPY is materially faster than the rate of growth from the short options. This prevents any opportunity for option profits to be reinvested in a wheel-like strategy.
1-4% per week is indeed doable for the short term depending on the underlying, but it is not sustainable. Extend such a strat over the span of several years and the eventual losses may generate a less-than-desirable CAGR.
I’m not aware of ETFs that retain and reinvest dividends as opposed to distributing them to shareholders. Perhaps come CEFs, but none that come to mind off the top of my head.