TLT Short Put 45 DTE Leveraged Options Backtest
In this post we’ll take a look at the backtest results of opening one TLT short put 45 DTE leveraged position each trading day from Jan 3 2007 through Aug 5 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold TLT.
There are 10 backtests in this study evaluating over 30,500 TLT short put 45 DTE leveraged trades.
Let’s dive in!
Contents
Summary
Systematically opening 45 DTE leveraged short put positions on TLT was profitable no matter which strategy was selected.
The 30D @ hold-till-expiration outperformed buy-and-hold TLT with regard to total return.
Methodology
Strategy Details
- Symbol: TLT
- Strategy: Short Put
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-01-03
- End Date: 2019-08-05
- 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 set using hindsight bias so that max margin utilization never exceeds 100%)
- Apply a 20% discount to displayed results. For example, if a strat depicts a CAGR of 10%, assume that it’ll yield 8% in practice.
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 vs holding till expiration.
Margin Utilization
Early management yielded a lower average margin utilization across all strategies when compared to holding till expiration.
Hindsight bias was used to maximize Reg-T margin utilization for each strategy. This allows a “best case” scenario for the option strategy to outperform 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 (aside from the early management 5D strategy which experienced substantial commission drag).
Early management had lower rates of premium capture vs holding till expiration.
Win Rate
Managing trades early underperformed holding till expiration with regard to win rate.
The riskier the trade the lower the win rate, with exception being the 5D strategy again due to commission drag.
Annual Volatility
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Monthly Returns
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Max Drawdown
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Drawdown Days
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
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
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Sharpe Ratio
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Profit Spent on Commission
15.61% – the blended average percent of profits spent on commission across all option strategies.
Total P/L
Early management underperformed holding till expiration with regard to total P/L.
Higher delta strategies yielded greater total P/L than lower delta strategies.
Overall
All option strategies were profitable.
Discussion
Let’s take a look at the risk-adjusted returns from this strategy and compare them against a cash-secured implementation.
An active subscription is needed to view this content. Already a subscriber? Log in. Not a subscriber? Sign up for just 99 USD a year. Learn more.
Additional Resources
Private, Custom Backtests
Discover your edge with private, custom backtests for as little as 99 USD. Learn more or contact us for a quote.
Trade Logs
Visit the trade log store and download the data used in this and other backtests.
s1 signal
Trade S&P 500 options more efficiently using the s1 signal. Learn more.
s2 signal
Trade GLD options more efficiently using the s2 signal. Learn more.
s4 signal
Trade Russell 2000 options more efficiently using the s4 signal. Learn more.
mREIT Preferred Share Dashboard
High-yield, low-beta alternatives to cash or treasury bills. Learn more.
Consultations
Schedule a consultation to review your specific scenario and get direct answers to your questions.
-
TLT short put 45 DTE Bundle$49.99
May 12, 2020 @ 3:56 pm
A large part of the bond returns over recent years has been an environment of ever-decreasing rates. Given that we’re at 0, and assuming we won’t go below (or much below) to negative rate territory (possibly a dangerous assumption), TLT won’t continue to have such fantastic returns, full stop. Similarly, leverages short put plays will not be as slam-dunk. That said, I expect unleveraged short put option strategies to perform well in a more sideways environment as debt and debt service increases and our desire to raise rates continues to remain deflated.
June 17, 2020 @ 1:41 pm
I think it would be interesting for Spintwig to reverse the prices of TLT and then do this backtest again. (IE, the most recent price becomes the first price; the first price becomes the most recent.) This might help simulate how this strategy would perform in a rising rates environment. I suspect that some OTM short puts would still be profitable.