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  1. Pushpaw
    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?



      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.


  2. Tomaz
    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.


  3. Pushpaw
    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.


  4. Pushpaw
    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).


  5. C-lab
    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 ( 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!


      • C-lab
        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.


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