In this post we’ll take a look at the backtest results of opening one VXX short call 45 DTE cash-secured position each trading day from June 1 2010 through January 30 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 or short VXX.
There are 10 backtests in this study evaluating over 21,800 VXX short call 45 DTE cash-secured trades.
Let’s dive in!
- Symbol VXX
- Strategy Short Call
- Start Date 2010-06-01
- End Date 2019-01-31
- Positions opened 1
- Entry Days every trading day
- Timing 3:46pm ET (EOD pricing)
- 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
- 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
- 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
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 SPY or short VXX.
The utility of the short call strategy as a portfolio hedging tool or other use will not be discussed and is out of scope.
Managing trades early lowered the win rate.
The riskier the trade the lower the win rate.
Worst Monthly Return
Average P/L Per Day
Average Trade Duration
Trades generally reached 50% max profit after only a third of the option duration. This means after 13 days the daily P/L is, on average, cut in half.
Compound Annual Growth Rate
Profit Spent on Commission
Compared to option strategies on other underlying, profits spent on commission for VXX calls is quite modest. 5.75% is the blended rate.
Ignoring the commission crushed 5D strategy, managing trades early lowered total P/L anywhere between 15-38%.
Every VXX short call option strategy was eventually profitable.
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.
There are a handful of option strategies on VXX that outperformed buy/hold SPY from a total return perspective but had a wild ride along the way. This volatility is observed in the Sharpe ratio calculations.
However, the swings of the short call option strategies pale in comparison to a “buy/hold” short position in VXX. Let’s see what that would look like.
Using iBorrowDesk (search VXXB – they haven’t updated the ticker yet), we see from Sept 17, 2018 till Sept 12, 2019 that Interactive Brokers has charged anywhere between 1.4% and 6.7% to borrow this underlying. The majority of the time the borrow cost has hovered between 3.0% and 3.2%.
Let’s call it 4% and factor that into the equity curve. We end up with the following chart.
Not too shabby if you’re okay with multiple million-dollar swings.
Systematically selling short calls on VXX is profitable.
Some VXX short call strategies outperformed buy-and-hold SPY albeit with a lower Sharpe ratio.
The 5D @ hold-till-expiration VXX short call strategy had the greatest risk-adjusted return.
Thanks for reading 🙂
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