Wednesday, September 9, 2015

Option Straddle Series - P&L Exits

During the next several weeks, I will show the backtest results for selling Straddles on the S&P 500 Index (SPX) and the Russell 2000 Index (RUT).  The prior post, Introduction To Options Straddles, introduced Straddles and compared them with Iron Butterflies.  For this new series, we will look at the following setup:

RUT and SPX short straddle backtest setup
(click to enlarge)

These short Straddles will be entered at five four different days-to-expiration (DTE): 38, 45, 52, 59 , and 66.  The core of this series is related to the exits.  I am going to follow the loss exit approach discussed on the Tastytrade Exiting Straddles episode:
  1. Straddle (25:NA) - exit if the trade has a loss of 25% of its initial credit OR at Expiration.
  2. Straddle (50:NA) - exit if the trade has a loss of 50% of its initial credit OR at Expiration.
  3. Straddle (75:NA) - exit if the trade has a loss of 75% of its initial credit OR at Expiration.
  4. Straddle (100:NA) - exit if the trade has a loss of 100% of its initial credit OR at Expiration.
  5. Straddle (125:NA) - exit if the trade has a loss of 125% of its initial credit OR at Expiration.
  6. Straddle (150:NA) - exit if the trade has a loss of 150% of its initial credit OR at Expiration.
  7. Straddle (175:NA) - exit if the trade has a loss of 175% of its initial credit OR at Expiration.
  8. Straddle (200:NA) - exit if the trade has a loss of 200% of its initial credit OR at Expiration.
For the eight options above, there are no profit related exits...they either exit for a loss or exit at expiration.  To clarify how these exits function, let's look at an example of the Straddle (100:NA) variation.  In this example, if  we sell a 1-lot Straddle for $2,000, we would take our loss when the Straddle had to be ought back at $4,000.  $4,000 - $2,000 = $2,000, or a loss of 100% of our initial credit.

For each of these eight loss based exits, I will also look at taking profits at 10%, 25%, 35%, and 45% of the initial credit received.  These percentages will replace the NA in the variations above.  For example, Straddle (25:10) would exit if the trade had a loss of 25% of its initial credit, OR if the trade had a profit of 10% of its initial credit, or at expiration.  In total I will show the results for 40 different exit approaches

These exits can also be thought of as risk:reward exits.  Using the prior example of the Straddle (25:10), we are risking 25% to make 10%.  These odds don't sound great from a classical stock strategy approach, but the win rate and probabilities of profit are key components of the Straddle strategy's profitability.

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Mark Stevenson said...

Dave, This work is hugely appreciated by the less computer literate like myself, especially as you are starting the backtest in 2007 before the market blew up in 2008. I note in the Tastytrade research that I have seen and read, they tend to start the backtests in 2009.

Dave R. said...

Thank you Mark....I really appreciate your comment!


simon said...

Hi Dave,
your post is awesome! I am wondering what software do you use to do option back testing? Swims thinkback does not do a good job at this kind of test. Thanks in advance.

Dave R. said...

Hi Simon,

Thanks for the note. I built a custom application for backtesting. You can find some info about it on the FAQs page (


simon said...

Hi Dave,
I am wondering if you can share the data or your backtest program with me. I am also a software guy. I would love to do more backtesting based on different strategies. Can you get those historical data for free from ivolatility? Thanks.

Dave R. said...

Sorry, neither the data nor the program(s) are in the public domain.

You can purchase data for many underlyings directly from iVolatility.


Unknown said...

Hi Dave, why do you have same number of trades for different strategies? For instance, number of trades for DTE38 should be almost two timer bigger than DTE73 for the same time period. The similar idea for early exit: if you have 10% loss exit rule the number of trades should be significantly bigger than "till expiration"

Dave R. said...


My tests are based on the monthly expiration cycle (this is mentioned on my FAQ page).

The tests I share on my blog are only for the RUT, SPX, and you know, the monthly options for these three indices expire on the third Friday of each month. There are twelve monthly expirations per year...this is not impacted by DTE.

For example, today, the December monthly options are 47 days from expiration...they expire on Friday, December 18th. If I enter a trade using the DEC options next week I could enter a 45 DTE DEC trade. If I entered a trade last week, I could have entered a 52 DTE DEC trade...same options chain.

Here's the expiration calendar from the CBOE:


Vasily Aristarkhov said...

Dave, thanks for your explanations. I believe it would be also interesting to compare "more realistic" conditions to understand how DTE impacts on real portfolio.Right now it's hard to say what is most profitable (just profit, not other criteria) way to sell options.
Anyway, your work looks amazing

Walter Rivetti said...

Hi David, can you clarify the exit strategy, please? The stop loss is automatic to the achievement of the price? Or wait at the end of the day, look at the price, and if it is beyond the stop loss, you close the strangle? Thanks for your time!

Dave R. said...

I use end of day (EOD) data in my backtests...this is mentioned on my FAQ page.
Exits are based on the price of the strangle at the end of the day and will be based on the EOD price.

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