In this post we’ll take a look at the backtest results of opening one USO short put 45 DTE leveraged 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 29,900 USO short put 45 DTE leveraged trades.
Let’s dive in!
Systematically opening 45 DTE leveraged short put positions on USO was unprofitable no matter which strategy was selected.
- Symbol: USO
- Strategy: Short Put
- Days Till Expiration: 45 DTE +/- 17, closest to 45
- Start Date: 2007-05-09
- End Date: 2019-08-06
- 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
- 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, where the short option expires after the long option, is 20% of the short option
- Margin requirement for long CALENDAR SPREAD positions, where the short options expires before the long option, is the net cost of the spread
- 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.
- 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
- Option positions are opened at 3:46pm ET
- Option positions are closed at 3:46pm ET (4:00pm if closed on the date of expiration)
- Commission to open, close early, or expire ITM is 1.00 USD per non-index underlying (eg: SPY, IWM, AAPL, etc.) contract
- Commission to open, close early, or expire ITM is 1.32 USD per index underlying (eg: SPX, RUT, etc.) 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
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.
Early management yielded a lower average margin utilization.
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.
All of the strategies experienced a negative premium capture. This signifies none of the strategies were profitable.
Early management lost less per trade than holding till expiration.
The higher the delta the better the premium capture.
Managing trades early hurt the win rate across the board. The difference narrowed as the delta increases.
The riskier the trade the lower the win rate.
Buy and hold has a value of 0% since it was not profitable when measured throughout the study start and end dates.
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
Profit Spent on Commission
All strategies were unprofitable before commissions so the usual chart and graph all say “unprofitable.” In lieu, here’s a table of direct commission costs for each strategy.
A quick reminder from the methodology section:
- 1 USD, all in, per contract:
- to open
- to close early
- expired ITM
- 0 USD, all in, per contract expired OTM / worthless
Higher delta strategies yielded greater loss than lower delta strategies. The same 16D and 30D hold-till-expiration exceptions we’ve seen above apply here.
Early management yielded smaller losses profits than holding-till-expiration across all but the 50D strategy.
Neither the option strategies nor buy-and-hold was profitable. However, several of the option strategies did outperform buy-and-hold on a total return perspective.
USO was a tough underlying for the leveraged short put strategy (and for the buy-and-hold approach, too). We saw how a cash-secured USO short put strategy performs. When we apply leverage we amplify the outcomes, which in this case is to lose money.
Ignore the different y-axis values; the equity curves are based on % return not $.
Private, Custom Backtests
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