SPX Straddle - 38 DTE - Manage Profits at 25%

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 third 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 25% 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 25% credit exits (described here), resulted in the equity curves below.

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The trade metrics for these different exits are shown in the table below.  The (100:25) variation stands out with one of the top P&L % / day readings, highest overall P&L %, and a decent win rate.  The (50:25) variation was also a top performer.

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

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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.  As we noticed in the last article, there is a clear trend of increasing P&L with increasing IV rank.

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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.

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The third image shows P&L in percentage terms versus days-in-trade (DIT).  We see the same two patterns that we observed at 10% profit management...when managing losses early (25%,  50%), the losses were fairly evenly distributed across DIT.  As the loss management becomes less aggressive (150% and higher), we see that the losses are concentrated above 25 DIT.

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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 25% credit exits (described here) resulted in the equity curves below.

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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%, 75%).  We observed this pattern with the 10% profit management also.  The win rate is 85% for all variations, except for the 25% loss management level.

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

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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 25% credit exits (described here) resulted in the equity curves below.

(click to enlarge)

The trade metrics for these different exits are shown in the table below.  Using the lower IVR filter did not improve any of the metrics other than the total P&L %.

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

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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 35% of the credit received.


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