SPX Straddle - 80 DTE - Manage Profits at 45%

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 80 days-to-expiration (DTE).  In this fifth post of five on 80 DTE straddles, we look at trades that use the same loss exits as shown in the first post, and in addition, take profits at 45% of the credit received.  The results displayed in this post represent data from 832 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 80 DTE equity curves.

No IV Rank Filter

In this section we 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 80 DTE and utilizing our loss exits and 45% 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 (100:45) variation stood out with the best P&L % / day reading, the highest P&L % per trade reading, the highest total P&L % value, and the highest win rate (of 70%).  Five other variations also had win rates of 70%.

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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 80 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 is very clear.

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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 30.

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The third image shows P&L in percentage terms versus days-in-trade (DIT).  In order to extract 45% of the credit, the trade duration needs to be longer...this is clearly evident with the clustering of profitable trades above 45 DIT.  At the higher loss management levels, 100% and greater, most of the losses were realized at expiration.  At these loss levels there were 29 losers out of 101 trades...a 70% win rate.

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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 80 DTE and utilizing our loss exits and 45% credit exits (described here) resulted in the equity curves below.  These are the second best returns for the 45% credit exit for all of the DTE tested up to this point...the 73 DTE were the best.

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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...19 out of 101 possible trades.  The top variations (highlighted in yellow) had higher P&L% per day readings, higher P&L% per trade values, better win rates and larger profit factors than the non-IVR filtered variations.  The best performer of the group was the (200:45) variation, although the (100:45) variation was also a strong performer.

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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 80 DTE and utilizing our loss exits and 45% credit exits (described here) resulted in the equity curves below.  These filtered trades have had a very good run all of 2015, but starting as early as mid-2014...this is a familiar patter for this IVR filter level.

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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.  The best performer of the group was the (100:45) variation.

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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 I'll summarize the automated backtest results of the 80 DTE ATM SPX short straddles.


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