VXX Short Call 45 DTE Cash-Secured Options Backtest
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!
Contents
Methodology
Core Strategy
- 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
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 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.
Results
Win Rate
Managing trades early lowered the win rate.
The riskier the trade the lower the win rate.
Annual Volatility
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Worst Monthly Return
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Average P/L Per Day
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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
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Sharpe Ratio
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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.
Total P/L
Ignoring the commission crushed 5D strategy, managing trades early lowered total P/L anywhere between 15-38%.
Overall
Every VXX short call option strategy was eventually 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.
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.
Summary
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 🙂
Additional Resources
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Thoughts? Feedback? Dedications? Shoutouts? Leave a message in the comments below!
September 13, 2019 @ 9:00 am
Great test. Looks like commissions really eat into the 5 delta. For people trading on a commission free broker that may swing the sharpe ratio more in their favor over SPY. Also seems like this would be a good one for a short call spread to help with some of those cases where VXX shoots up really quickly.
September 13, 2019 @ 12:12 pm
Interesting, is this the first backtest that actually beats SPY?
Remind me (I couldn’t find it in the methodology) – what do “50D-50”, “30D-50”, etc mean? Is that a 5D spread?
September 13, 2019 @ 12:54 pm
It is, but not on a risk-adjusted basis. EEM was the first I observed that had both a risk-adjusted and total return outperformance relative to the underlying.
50D-50 is a 50D position managed at 50% max profit or 21 DTE. 30D-50 is a 30D position managed at 50% max profit or 21 DTE. Not to be confused with 50D-30D-50, which is a 50D 30D spread (the study name will indicate whether it’s a credit or debit) managed at 50% max profit or 21 DTE.
I’ll update the methodology section to include clarity on the naming convention. Appreciate the feedback.
September 13, 2019 @ 12:55 pm
VXX short call spread is coming next week – stay tuned 🙂
September 14, 2019 @ 3:10 am
I wouldn’t go on with a short call – it’s the way optionsellers.com ruined their depot…
There is also a danger with the VXX for a Explosion.
So i’m looking forward for the short call spread
October 20, 2019 @ 4:57 am
Thanks for the back-testing.
1)How much was the max. loss during the trade? you wrote that
“the worst monthly return for example for 30D was -44.6%”
2) that means that if I sold a 30D call on VXX for $100 the max. loss was -$144.60?
3) During the month the 30D call for example didn’t show bigger loses?
4) I didn’t find the “VXX short call spread ” back-testing, can you please write the link?
October 20, 2019 @ 7:03 am
You’re welcome; thanks for stopping by!
1) ORATS reports that the max drawdown on the cash-secured VXX 30D hold-till-expiration strategy is 47.48%.
2) That means if you had $100 committed to the 30D strategy (think of it as investing $100 in an ETF that implements the 30D strategy behind the scenes) during the worst month, the $100 would become $55.4 – a loss of 44.6%.
3) That’s a good question. The cash-secured stats provided by ORATS reports as a monthly rollup. It’s quite possible a greater loss occurred during the “worst month”, or even a different month, but some winners may have occurred that brought the returns up from the lowest of lows. If we evaluate this as a leveraged strategy using the Options Backtest Builder – I’ve yet to do this on this particular study – we’ll see the exact day in which the bottom of the max draw down occurs.
4) Here you go: https://spintwig.com/vxx-short-vertical-call-spread-options-backtest-results/
January 29, 2020 @ 12:51 pm
What do you mean with ” cash secured call”?
for example if VXX is trading at $13
this study sell 10 calls $13 in a $13,000 account?
January 29, 2020 @ 3:49 pm
Essentially, yes.
January 29, 2020 @ 3:55 pm
Thanks! And during this study never received a margin call (or the balance went negative)?
January 29, 2020 @ 4:45 pm
Welcome!
I can’t speak to whether this would have generated a margin call in practice. That’s unfortunately something that can’t be explored with a backtest (particularly, buying power expansion). Notably, the account didn’t blow up despite the multi million dollar sings.