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Thursday, September 17, 2015

SPX Straddle - 38 DTE - Manage Profits at 10%

In this post we look at the backtest results of selling a one-lot, at-the-money (ATM) straddle on the S&P 500 Index (SPX), initiated at 38 days-to-expiration (DTE).  In this second post of five on 38 DTE straddles, we look at trades that use the same loss exits as shown in the first post, and in addition, take profits at 10% of the credit received.  The results displayed in this post represent data from more than 800 individual trades entered by the backtester.

For background on the setup for the backtests, as well as the nomenclature used in the charts and tables below, please see the introductory article for this series: Option Straddle Series - P&L Exits.

In the trade metrics tables, I've highlighted some of the metrics rows to indicate values that are in the upper half of the readings.  One of the metrics to note is the average P&L per day in percentage terms (P&L % / Trade - Avg. P&L / Day).  This is a measure of the P&L per day normalized to the maximum initial portfolio margin (initial PM) required for that trade run...it tells us the effectiveness of theta with respect to our margin requirement.  Also note that the y-axis scale is the same in all of the 38 DTE equity curves.


No IV Rank Filter

In this section we will look at the results of entering one trade for every monthly expiration regardless of the implied volatility (IV) rank of the SPX on the date of entry.  Entering these trades at 38 DTE and utilizing our loss exits and 10% credit exits (described here), resulted in the equity curves below.

SPX Short Options Straddle Equity Curves - 38 DTE - Risk:Reward 10% Exits
(click to enlarge)

The trade metrics for these different exits are shown in the table below.  The (25:10) variation stands out with the highest P&L % / day reading, highest overall P&L %, and a decent win rate...although not the highest in the group.

SPX Short Options Straddle Trade Metrics - 38 DTE - Risk:Reward 10% Exits
(click to enlarge)

The table below shows the distribution of returns in five-number summary format.  Hat-tip to tastytrade.

SPX Short Options Straddle 5 Number Summary - 38 DTE - Risk:Reward 10% Exits
(click to enlarge)

Below are three sets of scatter plots for selling 38 DTE ATM SPX straddles. The first image contains one scatter plot per strategy and shows P&L in percentage terms versus IV rank for the SPX. The IV rank was captured on the day each trade was initiated.  There is a clear trend of increasing P&L with increasing IV rank.

SPX Short Options Straddle Scatter Plot IV Rank versus P&L - 38 DTE - Risk:Reward 10% Exits
(click to enlarge)

The next image shows P&L in percentage terms versus initial ATM IV. This ATM IV was captured on the day each trade was initiated.  Higher IV resulted in higher returns, but the majority of the profitable trades occurred at lower IV.

SPX Short Options Straddle Scatter Plot IV versus P&L - 38 DTE - Risk:Reward 10% Exits
(click to enlarge)

The third image shows P&L in percentage terms versus days-in-trade (DIT).  When managing losses early (25%,  50%), the losses were fairly evenly distributed across DIT.  As the loss management becomes less aggressive, we see that the losses are concentrated above 25 DIT...interesting!

SPX Short Options Straddle Scatter Plot DIT versus P&L - 38 DTE - Risk:Reward 10% Exits
(click to enlarge)


IV Rank > 50% Filter

In this section we will look at the results of entering one trade for every monthly expiration only when the IV rank of the SPX is greater than 50% ( >50% ).  Entering these trades at 38 DTE and utilizing our loss exits and 10% credit exits (described here) resulted in the equity curves below.

SPX Short Options Straddle Equity Curves - 38 DTE - IV Rank > 50 - Risk:Reward 10% Exits
(click to enlarge)

The trade metrics for these different exits are shown in the table below.  There are significantly fewer trades that meet the >50% IVR criteria, but the P&L% per day readings are much higher at the lower loss levels (25%, 50%)

SPX Short Options Straddle Trade Metrics - 38 DTE - IV Rank > 50 - Risk:Reward 10% Exits
(click to enlarge)

The table below shows the distribution of returns in five-number summary format.

SPX Short Options Straddle 5 Number Summary - 38 DTE - IV Rank > 50 - Risk:Reward 10% Exits
(click to enlarge)


IV Rank < 50% Filter

In this section we will look at the results of entering one trade for every monthly expiration only when the IV rank of the SPX is less than 50% ( <50% ).  Entering these trades at 38 DTE and utilizing our loss exits and 10% credit exits (described here) resulted in the equity curves below.

SPX Short Options Straddle Equity Curves - 38 DTE - IV Rank < 50 - Risk:Reward 10% Exits
(click to enlarge)

The trade metrics for these different exits are shown in the table below.  Using the lower IVR filter increased our win rate for the trades utilizing the larger loss exits, resulted in larger profit factor readings, and solid total P&L numbers....very interesting!

SPX Short Options Straddle Trade Metrics - 38 DTE - IV Rank < 50 - Risk:Reward 10% Exits
(click to enlarge)

The table below shows the distribution of returns in five-number summary format.

SPX Short Options Straddle 5 Number Summary - 38 DTE - IV Rank < 50 - Risk:Reward 10% Exits
(click to enlarge)

In the next post we will look at the backtest results of 38 DTE ATM SPX short straddles using the same loss thresholds as above, but with profit taking occurring at 25% of the credit received.


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2 comments:

yoshi54 said...

You have something here that Tastytrade doesn't have yet, a strategy that works well in Low IV, and Low IV Rank. Selling straddles with a 10% profit, and getting out at 25-200% seems to work well in Low IV pretty consistently. Looking at the 45 days, this seems to be relatively consistent there too. I wonder if it would benefit them to see some of your work here on this.

Dave R. said...

Thanks Yoshi.

That variation does look pretty good doesn't it. As we move to higher DTE, there are other variations that work surprisingly well too...there are some very high P&L numbers with the higher DTE trades that I'll show in the coming weeks.

I have shared my work with Tom S at TT and he has forwarded my work to his research team. I've traded a number of emails with them since April of this year. I'm not sure if they follow my blog though.

Thanks,
Dave

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