T Short Put 45 DTE Leveraged Options Backtest
In this post we’ll take a look at the backtest results of opening one T short put 45 DTE leveraged position each trading day from January 3 2007 through August 29 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold T.
There are 10 backtests in this study evaluating over 29,800 T short put 45 DTE leveraged trades.
Let’s dive in!
Contents
Summary
Systematically opening 45 DTE leveraged short put positions on T was profitable no matter which strategy was selected.
The 10D, 16D, 30D and 50D hold-till-expiration 45 DTE leveraged short put strategies outperformed performed buy-and-hold T with regard to total return.
Methodology
Strategy Details
- Symbol: T
- Strategy: Short Put
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-01-03
- End Date: 2019-08-29
- Positions opened per trade: 1
- Entry Days: daily
- 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
- 10D short put
- 16D short put
- 30D short put
- 50D short put
- Trade Exit
- 50% max profit or 21 DTE, whichever occurs first
- Hold till expiration
- Max Margin Utilization Target (short option strats only): 100% | 5x leverage
- Max Drawdown Target: 99% | account value shall not go negative
Assumptions
- Margin requirements are always satisfied
- Margin calls never occur
- 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
- Early assignment never occurs
Mechanics
- Prices are in USD
- Prices are nominal (not adjusted for inflation)
- 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 expiration / position exit
- Commission to open, close early, or expire ITM is 1.00 USD per contract
- Commission to expire worthless is 0.00 USD per contract
- 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 $100 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 $100 increments such that max drawdown is between 80-100%, closest to 100%, of max drawdown target
- For comprehensive details, visit the methodology page
Results
Starting Capital
Early management allows a smaller starting portfolio value since the maxim number of concurrent positions is capped. Less capital is “turned over” faster than holding till expiration.
Margin Utilization
Early management yielded a lower average margin utilization.
Hindsight bias was used in to maximize Reg-T margin utilization for each strategy. This allows for a “best case” scenario, baring the limitations of backtesting such as no margin calls, for the option strategy to outperform relative to the benchmark.
Also displayed is the date in which each strategy experienced maximum margin utilization.
Premium Capture
The higher the delta, the lower the premium capture.
Early management yielded lower rates of premium capture than holding till expiration.
Win Rate
Managing trades early lowered the win rate for all strategies.
Baring the 5D early management strategy which suffered from commission drag, the riskier the trade the lower the win rate.
Annual Volatility
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Monthly Returns
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Max Drawdown
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Drawdown Days
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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
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Sharpe Ratio
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Profit Spent on Commission
33.1% – the blended average percent of profits spent on commission across all short put strategies.
There is not much premium available on a short put trade as T is intrinsically a low vol underlying. Couple this with a relatively low notional stock price and commissions eat away substantial profits.
Total P/L
Higher delta strategies yielded more profit than lower delta strategies.
Holding till expiration yielded greater profits than managing early across all strategies.
Overall
All option strategies were profitable.
Discussion
What’s interesting to note here is that there the 10D, 16D, 30D and 50D hold till expiration strategies yield higher total P/L relative to buy-and-hold T. In fact, historically, one would have been better off using options on T to generate income than buying T outright and holding for the dividend.
Meanwhile, early management proved to be a detractor in every performance metric for a few reasons:
- The underlying price was between ~$22-$41 over the last 12 years. Thus, premium collected was small in absolute terms and closing a trade early took a disproportionately large bite out of the profits.
- Because $1 or $0.50 differences in strike price can represent up to a 4.5% expected move in the underlying, opening a position daily often resulted in having up to 15 or more positions in the same strike/expiration for a given delta target.
- If a position is underwater or otherwise <50% max profit when it’s managed at the 21 DTE target (37% of the 16D strategy trades encountered this scenario), all 15+ positions are closed at what may be an actual (position ITM / negative P/L) or consequential (negative P/L after commission) loss.
- Compare this to SPY where $1 is less than a 1% expected move in 2007 and, consequently, positions with the same CUSIP rarely exceeds 3.
Additional Resources
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January 3, 2020 @ 10:19 am
Thanks for posting – good to see how strategy performs with leverage.
It mentions that a subscription will easily pay for itself with a few trades. Curious to know what spintwig recommended approach to trading is?
Thanks
January 4, 2020 @ 10:48 pm
You’re welcome!
I recommend using a data-driven approach :). For readers that trade options as their means to participate in the market, this research can help improve their portfolio metrics and ultimately bottom line.
January 3, 2020 @ 11:43 am
5 delta sharpe, wow, just wow. Sharpe above 1 is very good, sharpe above 2 is exceptional, sharpe over 3? Dont think many hedge funds can brag with it, specially over 12 years! A year or two, maybe. But a decade.. !
Great research man! I think you are doing a lot of us a favour by doing such great back tests and hope we will be able to give back some day! You are an inspiration!
January 4, 2020 @ 11:00 pm
Yeah, I found several of the hold-till-expiration trades particularly interesting. For example, layering a 5D T strategy on a portfolio of BIL or SHV is seems like a plausible way to boost returns on idle cash (or the bond portion of one’s portfolio). Of course, I would want to diversify this slightly and perhaps mix in VZ positions, assuming they have similar performance characteristics.
Happy to hear you’re finding this research useful! It has definitely impacted my own trading (cut way back in favor of investing, actually). Hopefully it is having a positive impact for others as well.
January 3, 2020 @ 1:59 pm
Why do you have manage at 50% or 21DTE? The 21DTE rule likely skews results negatively. Don’t think it accurately represents a 50% profit target when both rules used together.
January 4, 2020 @ 11:12 pm
The 21 DTE management mechanic aims to avoid gamma risk. If the profit target isn’t hit, take it off and start with a fresh 45 DTE position. I don’t have any research dedicated specifically to gamma risk, but the effects can be seen in the SPY 45 DTE Short Straddle Cash-Secured backtest.
Consider the average daily P/L, worst monthly return and Sharpe ratio metrics. Various profit targets are defined then DTE management targets are walked down in 1 week increments from 28 DTE till hold-till expiration. Managing at 21 DTE was optimal across all applicable profit targets.
January 6, 2020 @ 9:38 pm
My point is simply that it’s not an accurate representation of how 50% profit targets will perform compared with letting the position go to expiration. The 21 DTE rule will supersede the 50% profit target in many instances when the position could have won at 50% if it had been left to go longer. So the fact that the win rate on letting go to expiration exceeds 50%/21DTE does not accurately represent a 50% profit target rule, it more represents the 21DTE rule. My observation from backtesting is that 50% profit target generally increases win rate. It certainly won’t have lower win rate than letting go to expiration as that’s actually impossible. Should at least be the same win rate. Because 50% profit target usually closes earlier, more positions are opened and the return is often higher than letting go to expiration. Just my observation and of course not applicable in all instances.
January 7, 2020 @ 8:14 pm
Ah, understood. Agree, using both exit criteria will yield a different result compared to using just one.
You’re spot on. In this particular study the 21 DTE early-management exit rule is largely responsible for the lower win rate and higher vol. This is primarily due to Vega risk (aka: sensitivity to IV changes), which this strategy is particularly exposed due to it being a low-vol underlying.
Consider an earnings event. IV tends to increase in anticipation of earnings and decrease afterward. This is the kind of risk that’s captured by time-based early management but avoided in holding till expiraiton (or adjusting the strategy around earnings events). If a position is put on such that the 21 DTE mark is a day or two before earnings, IV swells and the trade is managed early for a loss.
This phenomena happens in general but is less apparent when the underlying typically has substantial price swings (I’m looking at you, TSLA).
July 9, 2020 @ 12:55 am
Hello, I’m loving all the info you have here but am a bit confused as to how much leverage is used. Is the backtest assuming you are using the same amount of margin BP as it would take to hold the stock?
July 9, 2020 @ 2:38 am
Leverage is described in the “Margin Utilization” section. Specifically, “Max Margin Utilization.”
A short put will require ~20% of the notional amount as collateral. A portfolio that utilizes 20% of it’s margin (initial buying power) is considered cash-secured or 1x leverage. Each backtest in this study has a max margin utilization value of ~100% or 5x leverage. If max margin utilization was, say 60%, then the strategy would be described as having 3x leverage.
A few weeks ago I did a guest study (https://earlyretirementnow.com/2020/06/17/passive-income-through-option-writing-part-5/) that looked at a 5D SPY short put and compared different leverage amounts (1x through 5x). If you scroll down to the “Starting Capital” heading you’ll see the max margin targets of ~20, 40, 60, 80 and 100% corresponding with 1, 2, 3 ,4 and 5x leverage.
Average margin utilization is often less than the max value due to multiple positions closing on the same day (multiple positions with identical expiration dates or volatility/underlying move triggers early management). As new positions are opened daily the margin utilization works its way back to the target value.
Hope this helps!
July 9, 2020 @ 7:44 pm
Thanks for getting back to me. This definitely clears things up. I actually read BigERNs post featuring you last week and it’s what lead me here!
July 9, 2020 @ 9:51 pm
You’re welcome!
Ah, good to know. Feel free to fore away with any other questions you may have. I’m happy to answer.
I’m kicking around a few ideas to make the amount of leverage used easier to glean. This isn’t the first time this question has been asked.