USO Short Call 45 DTE Cash-Secured Options Backtest

4 min read

In this post we’ll take a look at the backtest results of opening one USO short call 45 DTE cash-secured position each trading day from May 9 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 USO.

There are 10 backtests in this study evaluating over 30,300 USO short call 45 DTE cash-secured trades.

Let’s dive in!

Methodology

Core Strategy

• Symbol USO
• Strategy Short Call
• Start Date 2007-05-09
• End Date 2019-08-06
• Positions opened 1
• Entry Days every trading day
• Timing 3:46 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 call
  • 10D short call
  • 16D short call
  • 30D short call
  • 50D short call
• 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 call positions and will interpret the results from the lens of income generation relative to buy-and-hold USO.

The utility of the short call 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.

Generally speaking, the riskier the trade the lower the win rate. We see the 5D and 10D early management positions take a hit due to commission drag.

Annual Volatility

Worst Monthly Return

Average P/L Per Day

Average Trade Duration

Managing trades at 50% max profit or 21 DTE improved the efficiency of capital. Unfortunately commission drag more than offset this efficiency.

Compound Annual Growth Rate

Sharpe Ratio

Profit Spent on Commission

Selling calls on USO offered nominal opportunities. Managing early consumed more than half of all captured premium.

Total P/L

Higher delta strategies performed better. This makes sense the underlying lost over 75% of its value during this time.

Overall

The short call strategy experienced steep, unmitigated losses early on. Despite the initial drawdown out of the gate, unmanaged short call strategies eventually became profitable.

Discussion

USO experiences a notable spike up in the first half of 2008 followed by two notable drops – one that occurs between 2008 / 2009 and one that occurs between 2014 / 2015. Aside from these events USO remains relatively flat.

Maintaining a systematic long-term strategy in USO, whether through an option strategy or buy and hold, would have been a challenging endeavor. The uncapped loss potential of naked calls and underlying spike in 2008 would have discouraged many. Suppose the call were covered for the duration of the backtest. USO lost more than the short calls gained which would have also yielded a negative return. Short puts on USO would have softened the losses across the board but again would have been an unprofitable endeavor. This is a scenario where a simple buy-and-hold approach would have yielded lower profitability than systematically selling calls or puts.

Summary

Systematically selling short calls on USO was profitable when positions were held till expiration.

All USO short call strategies outperformed buy-and-hold USO.

The 10D @ hold-till-expiraiton USO short call strategy had the greatest risk-adjusted return.

Thanks for reading 🙂

Additional Resources

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