January 24, 2020

USO Short Put 45 DTE Leveraged Options Backtest

spintwig.com Options 45 DTE, backtest, Early Management, Hold Till Expiration, Leveraged, Short Put, USO 0

3 min read

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!

Summary

Systematically opening 45 DTE leveraged short put positions on USO was unprofitable no matter which strategy was selected.

Methodology

Strategy Details

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

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, 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.

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
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

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 than holding till expiration.

Margin Utilization

Early management yielded a lower average margin utilization.

USO Short Put 45 DTE L max margin utilization table

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.

Premium Capture

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.

Win Rate

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.

Annual Volatility

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Monthly Returns

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Max Drawdown

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Drawdown Days

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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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Sharpe Ratio

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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.

USO Short Put 45 DTE L commissions table

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

Total P/L

USO Short Put 45 DTE L total profit and loss

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.

Overall

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.

Discussion

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.