SPY Wheel 7 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 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!

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

Max Drawdown

Average Trade Duration

Short calls and short puts were 7DTE positions and held till expiration.

Compound Annual Growth Rate

Annual Volatility

Sharpe Ratio

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:

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.

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

Risk Characteristics

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

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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