SPX Straddle - 45 DTE - Manage Profits at 35%

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 45 days-to-expiration (DTE).  In this fourth post of five on 45 DTE straddles, we look at trades that use the same loss exits as shown in the first post, and in addition, take profits at 35% of the credit received.  The results displayed in this post represent data from 816 individual trades entered by the automated 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, some of the metrics rows have been highlighted 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 45 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 rank (IVR) of the SPX on the date of entry.  Entering these trades at 45 DTE and utilizing our loss exits and 35% 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 (125:35) and (150:35) variations stand out with solid P&L % / day readings, highest total P&L %, and the highest win rates.

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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 45 DTE ATM SPX straddles. The first image contains one scatter plot per strategy and shows P&L in percentage terms versus IVR for the SPX. The IVR was captured on the day each trade was initiated.  As we noticed in the prior articles, there is a clear trend of increasing P&L with increasing IVR.

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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 and unprofitable trades occurred at lower IV...below 35...the same pattern we noticed in the last post on managing profits at 25%.  We also see loss clustering between 10 and 20 IV at the higher loss management levels.  We noticed this pattern in the last post as well.

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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 in the prior articles...when managing losses early (25%,  50%), the losses were fairly evenly distributed across DIT.  As the loss management becomes less aggressive (125% and higher), we see that the losses are concentrated later in the trades.  Also, as we've seen in the other posts, most of these losses were not realized until expiration...meaning many of these particular losses were less than our loss threshold values.

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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 IVR of the SPX is greater than 50% ( >50% ).  Entering these trades at 45 DTE and utilizing our loss exits and 35% 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.  As we've seen with the earlier articles, there are significantly fewer trades that meet the >50% IVR criteria.  The best variations of the group have much higher P&L% per day readings.  We observed this pattern with the 10% and 25% profit management levels also.  The win rate is 86% for the top four variations, which all have higher loss management thresholds.

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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 IVR of the SPX is less than 50% ( <50% ).  Entering these trades at 45 DTE and utilizing our loss exits and 35% 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.  Using the lower IVR filter did not improve any of the metrics.

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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 45 DTE ATM SPX short straddles using the same loss thresholds as above, but with profit taking occurring at 45% of the credit received.


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