T Short Put 45 DTE Leveraged Options Backtest

6 min read

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!

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 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

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

Monthly Returns

Max Drawdown

Drawdown Days

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

Sharpe Ratio

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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