VXX Short Call 45 DTE Leveraged Options Backtest

3 min read

In this post we’ll take a look at the backtest results of opening one VXX short call 45 DTE leveraged position each trading day from Jun 1 2010 through Aug 19 2019 and see if there are any discernible trends. We’ll also explore the profitable strategies to see if any outperform buy-and-hold SPY.

There are 10 backtests in this study evaluating over 21,600 VXX short call 45 DTE leveraged trades.

Let’s dive in!

Summary

Systematically opening 45 DTE leveraged short call positions on VXX was profitable no matter which strategy was selected.

No option strategies outperformed buy-and-hold SPY with regard to total return.

Methodology

Strategy Details

• Symbol: VXX
• Strategy: Short Call
• Days Till Expiration: 45 DTE +/- 17, closest to 45
• Start Date: 2010-06-01
• End Date: 2019-08-19
• Positions opened per trade: 1
• Entry Days every trading day in which entry criteria is satisfied
• 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 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
• 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 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

Generally speaking, the higher the delta the lower the premium capture (aside from the early management 5D strategy which experienced substantial commission drag). 30D and 50D early management strategies experienced roughly the same amount of premium capture.

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

Max Drawdown

Drawdown Days

Average Trade Duration

Managing trades at 50% max profit or 21 DTE yielded trade durations less than half the duration of hold-till-expiration. Again 50D is an exception.

Compound Annual Growth Rate

Sharpe Ratio

Profit Spent on Commission

10.29% – 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. 50D is the exception.

Higher delta strategies yielded greater total P/L than lower delta strategies.

Overall

All option strategies were profitable.

Discussion

Introduced by Barclays in 2009 and redeemed in 2019, VXX was a 10-year ETN, or Exchange Traded Note, that tracked the VIX Short-Term futures. As VXX was approaching the redemption date Barclays introduced a new 30-year iteration of the same product called VXXB on Jan 17 2018. On May 2 2019, Barclays renamed VXXB to VXX.

The data used in the VXX equity curve uses the legacy VXX from 2009-2018, then utilizes the “new” VXX from Jan 2019 onward.

Similar to the cash-secured version of this backtest, there were a few strategies that outperformed SPY with regard to total return but they also had a substantial amount of volatility.

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