TLT Short Put 45 DTE Cash-Secured Options Backtest

4 min read

In this post we’ll take a look at the backtest results of opening one TLT short put each trading day from Jan 3 2007 through August 6 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 30,700 TLT short put trades.

Let’s dive in!

Methodology

Core Strategy

• Symbol TLT
• Strategy Short Put
• Start Date 2007-01-03
• End Date 2019-08-06
• Positions opened 1
• Entry Days every trading day
• 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 short put positions and will interpret the results from the lens of income generation relative to buy-and-hold TLT.

The utility of the short put strategy as a portfolio hedging tool or other use will not be discussed and is out of scope.

Results

Win Rate

Managing trades early lowered the win rate.

The riskier the trade the lower the win rate.

Annual Volatility

Worst Monthly Return

Average P/L Per Day

Average Trade Duration

The 5D strategies experienced about 10% fewer occurrences relative to the 16D, 30D and 50D strategies due to no positions existing in the 0.5 – 9.5 delta range during volatile times. Similarly, the 10D strategies saw 3% fewer occurrences.

These artifacts are what cause the 5D 50% strategy to increase in average trade duration and the 5D and 10D hold-till-expiration strategies to have lower average durations.

Compound Annual Growth Rate

Sharpe Ratio

Profit Spent on Commission

Here we see the magnitude of commission drag on the respective strategies.

23.83% – the blended average percent of profits spent on commission across all short put strategies.

Total P/L

Holding till expiration yielded improved total P/L across the board.

Overall

Every option strategy was both profitable and underperformed the buy-and-hold strategy.

Discussion

The primary driver of TLT’s performance is the 30-year US treasury rate. Let’s overlay data from FRED onto the overall performance chart.

As we can see, there is a strong inverse relationship between TLT and the 30-year interest rate. As 30Y rates go down, TLT goes up. As 30Y rates go up, TLT goes down.

The federal funds rate has less influence at the 20+ year mark on the maturity curve than, say, at the 3-year mark.

I’ll leave the “influencing factors of the 20+ year curve” discussion for the comment section.

Summary

Systematically selling short puts on TLT is profitable.

All TLT short put strategies underperformed buy-and-hold TLT.

The 5D @ hold-till-expiration TLT short put strategy had the greatest risk-adjusted return.

Thanks for reading 🙂

Additional Resources

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