T Short Put 45 DTE Cash-Secured Options Backtest

In this post we’ll take a look at the backtest results of opening one T short put 45 DTE cash-secured position each trading day from January 3 2007 through August 30 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 30,000 T short put 45 DTE cash-secured trades.
Let’s dive in!
Contents
Methodology
Core Strategy
- Symbol T
- Strategy Short Put
- Start Date 2007-01-03
- End Date 2019-08-30
- Positions opened 1
- Entry Days every trading day in which entry criteria is satisfied
- 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
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 held as cash and earns no interest
- 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
- For comprehensive details, visit the methodology page
Scope
This study seeks to measure the performance of opening option positions and will interpret the results from the lens of income generation relative to buy-and-hold.
The utility or effectiveness of options as a hedging tool or other use will not be discussed and is out of scope.
Results
Win Rate


Managing trades early lowered the win rate for all strategies.
Baring the 5D and 10D early management strategies which suffered from commission drag, the riskier the trade the lower the win rate.
Annual Volatility
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Worst Monthly Return
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Average P/L Per Day
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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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Time in Market


The strategies experienced nearly 100% market participation throughout the duration of the backtest.
Sharpe Ratio
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Profit Spent on Commission


17.1% – the blended average percent of profits spent on commission across all short put strategies.
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
Unlike AAPL or AMZN, T wasn’t a rocket ship of capital appreciation. In fact, it’s quite the opposite: a low volatility stock that pays an appreciable dividend.
Early management proved to be a detractor in every performance metric. Why? 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.
One argument that may be posed is that most plays on T are all about generating income from capital and thus portfolio volatility and total return metrics are irrelevant. It could further be argued that in order to compare apples to apples we should compare income generation of T against the profits of options on T.
I would counter this argument stating that it is a flawed approach to view an investment in light of something other than total return. Suppose an underlying didn’t pay dividends. Then what? Do we rule that options outperform in all scenarios since the underlying doesn’t “generate income?” Of course not! Hence, total return is the benchmark.
Summary
Systematically opening cash-secured short put positions on T was profitable no matter which strategy was selected.
All strategies underperformed buy-and-hold T with regard to total return.
The 5D, 10D and 16D early management strategies outperformed buy-and-hold T with regard to risk-adjusted return.
The 5D @ hold-till-expiration had the greatest risk-adjusted return among the cash-secured option strategies.
Additional Resources
Custom Backtests
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- trades ideas remain confidential
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- a master-results spreadsheet
- raw trade logs and data sources
- most custom research is completed within 5 business days
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Trade Logs
Visit the trade log store to download the trade logs associated with this and other published studies.
Thoughts? Feedback? Dedications? Shoutouts? Leave a message in the comments below!
November 5, 2019 @ 10:21 am
A couple of questions:
1) Does the CAGR and Total P/L of T stock include dividends?
2) Does the CAGR and Total P/L of the cash secured put strategies include interest that is earned on the cash that is serving as collateral for the puts?
November 5, 2019 @ 2:43 pm
1) Yes. CAGR and all other stats, on T as well as all the other studies, are based on total return / dividends reinvested where applicable.
2) The methodology of the cash-secured strategies ensures every penny of the portfolio is allocated at all times. There is no spare cash available to accrue interest.
November 5, 2019 @ 4:02 pm
Perhaps the strategy should not be called “cash secured short put”. A cash secured put requires cash to be set aside to buy T stock should the put be assigned. At some brokerages like Fidelity, the cash collateral can be put in a money market fund to earn around the 3 month t bill rate. This interest can be a significant contribution to CAGR and P/L especially for the low delta strategies.
The strategy you are describing, instead seems like selling puts with a 0% margin requirement.
November 5, 2019 @ 6:23 pm
Cash secured, meaning non-leveraged.
You have a valid point. This is why P/L is calculated using average daily returns as opposed to using a static amount of capital that can have residual cash (or idle premium) accruing interest. The strategy results reflect a scenario where all capital is allocated at all times. Said another way, the results depicted are what an ETF would yield if the respective strategy was running behind the scenes with perfect capital allocation tactics.
This methodology of using average daily P/L ensures the following issues are avoided:
-option strategy underperformance causes the backtest to fail due to hitting capital ceilings (i.e. unable to open a new position daily)
-option strategy outperformance causes the returns to drag due to failure to allocate the additional capital (i.e. capital exists to open more than one position on a given day but instead sits unused accruing interest at the risk-free rate).