SPX Straddle - 59 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 59 days-to-expiration (DTE).  In this third post of five on 59 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 824 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 59 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 59 DTE and utilizing our loss exits and 25% credit exits (described here), resulted in the equity curves below...nice returns and reasonably smooth...

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The trade metrics for these different exits are shown in the table below.  The (75:25) variation stands out with the top P&L % per day reading, highest overall P&L % value, highest P&L % per trade, and a solid win rate.  The second best variation was the familiar (125:25) strategy.  These numbers are much better than the 52 DTE variations.

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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 59 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.  The trend of increasing P&L with increasing IVR continues.

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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 an IV below 40.  The majority of the losing trades occur in the IV range of 10 to 25.

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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 before...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 most of the losses were not realized until expiration...meaning many of these particular losses were less than our 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 59 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...less than 20% of the available trades...this is a consistent trend with the > 50% IVR filter.  Using this IVR filter, causes six of the eight strategy variations to have win rates of 95%...only one losing trade out of the trades that were taken!  The (75:25) variation was the best out of the eight strategies.

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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 59 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.  The lower IVR filter had less of an impact at this DTE...the metrics were very close to the metrics for the unfiltered IVR strategy variations.

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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 59 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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