SPX Straddle - Backtest Results Summary

Over the last 40+ blog posts we took a fairly detailed look at the backtest results of 28,840 short straddles on the S&P 500 Index (SPX).  I provided a bit more detail in these 40+ posts than usual.  While I didn't provide all of my analysis on the SPX short straddles, there was enough to paint a solid picture of the performance of short straddles, and how their behavior changes with implied volatility (IV) and implied volatility rank (IVR).

In this post, I won't discuss how these trades were structured and managed. 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.

At a high level, we tested 7 different days-to-expiration (DTE) for trade entry.  For each of these DTE, we tested 8 different loss management levels (based on the credit received for selling the straddle).  For each of these loss management levels, we tested 5 different profit management levels, again based on the credit received for selling the straddle.  This comes out to 280 different tests for each monthly option expiration  (7 x 8 x 5 = 280).  We backtested all of the monthly options expirations starting in January 2007 and running through August 2015...a few more than 100 monthly options expirations...and that's how we got to the 28,840 trades.  This does not include the 5 IVR filters that were tested (no filter, >25, <25, >50, <50) ... If I did, we'd need to multiply the 28,840 by 5.


Equity Curves
Enough of the intro, let's get into the results.  Just like I've done in my prior full-summary posts, I'm including equity curves for each of the DTE.  In the images below, each row is a separate DTE, starting with 38 DTE at the top, and ending with 80 DTE at the bottom.  I am only including three profit taking levels (10%, 25%, and 35%) in order to fit a representative number of equity curves in this post.  Also, note that the y-axis is the same across all 21 of the equity curves below.

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So what can we learn from these equity curves?  Mostly common sense stuff...the trades with higher profit taking levels had the greatest returns for a given DTE.  Also, the trades with the longer durations (higher DTE), in general had greater returns for a given profit taking level.  Some obvious outliers in these trends occurred with the 59 DTE, 10% and 25% profit taking variations


General Trends
If you read all 40+ straddle posts, a few other patterns became apparent:

IV / IVR Scatter Plots
The higher the IV, or IVR, the larger the returns for a given trade.  This makes sense, since our profit taking is tied to the credit received, and a higher IV or IVR will result in a larger credit compared to a trade entered at a lower IV or IVR.  This also has an impact on our expiration breakeven points for the trade.

IV Scatter Plots
Another scatter plot pattern highlighted the fact that many trades were entered at an IV level between 10 and 30...both winning and losing trades.  This also makes sense considering the range of the VIX.  Coincidentally, just this week Tastytrade had a show where they pointed out that since 1990, the VIX has traded below 15 one-third of the time.  You can see this TT episode here.

DIT Scatter Plots
A third scatter plot pattern showed that the higher the DTE and/or the higher the profit taking percentage, the longer you needed to stay in a trade.  Again, this was to be expected, but it was nice to see that the data confirmed our intuition.

IVR Filtering
The most consistent IVR patterns were related to the IVR > 50% filter.  In general, trades that met the IVR > 50% criteria had the highest win rates, highest P&L readings, and best profit factors.  The downside?  ...only about 20% of all potential trades met this IVR criteria ... so, only two or three trades per year.  When you do see this filter criteria met, you should strongly consider increasing your size for these SPX short straddles.


Quantitative Results
In all of the tables below, I followed the same structure as the tables in the summary posts for the individual DTE.  The only difference is that the heat map coloring below evaluates all of the data, so that we can visualize the strength of IVR filters, profit taking levels, and loss taking levels across the entire data set.

The first table shows the normalized percent P&L per day for all of the strategy variations.  The variations that met the IVR > 50% filter had the highest readings.  As I mentioned above, you were only able to enter these trades two or three times per year ... only two or three times per year did we see an SPX IVR level greater than 50%.  Because of this limitation, you will only see these high daily return numbers for a small percentage of days during the year.  Considering this, one use of the IVR filter could be as an indicator to increase your position size.  Also, recently there was an interesting Tastytrade show on P&L per day and portfolio returns...you can watch it here.  Keep in mind that you need to consider days-in-trade (DIT) and the total number of trades when evaluating your portfolio returns when using the P&L per day values below.

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The second table shows the normalized percent P&L per trade for all of the strategy variations.  Again, we see the highest per trade returns associated with the variations that met the IVR > 50% filter.  There were fewer of these IVR > 50% trades, and these trades had higher win rates...resulting in high per trade returns.  There was also an increased IV on entry associated with these particular trades, which resulted in higher credits for these trades.

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The third table shows the win rate for all of the strategy variations.  The highest win rates occurred at the 10% profit taking level, regardless of IVR filter level.  Most of these particular win rates were in the 90% + range.  For the IVR > 50% filter, the high win rates spanned multiple profit taking levels.  For the non-IVR filtered variations and the 25% profit taking level, we see many win rates at or above 80% across most DTE.  For a monthly straddle trader, this isn't a bad win rate.

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The fourth table shows Sortino Ratios for all of the strategy variations.  There are clearly areas of strength for the Sortino readings, but patterns/generalizations for positive readings are not very strong/clear.

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The fifth table shows the profit factors for each of the strategy variations.  In general, the highest readings occured with the variations meeting the IVR > 50% filter.

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The sixth table shows days-in-trade (DIT) for each of the strategy variations.  So what do we notice...common sense again...the quicker you take profits or losses, the shorter your trade duration.  Also, longer DTE variations required you to stay in your trades longer in order to hit your profit exit.  In general, we can see in the table that, to collect 10% of the credit received (10% profit taking level) required a trade duration of roughly 30% of the entry DTE.  At the 25% profit taking level you needed to stay in the trade around 60% of the entry DTE.  For the 35% profit taking level it was about 70% of the entry DTE; 45% profit taking took your trade duration to about 80% of the entry DTE.  These estimates are for the non-IVR filtered strategy variations.

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The seventh table shows the number of trades that were entered for each strategy variation.  The number of trades for a particular variation, along with the DIT (previous table) have a large impact on your portfolio returns.  As soon as you apply an IVR filter to trade entry, you reduce the number of trades that you take...as seen in the table below.  An alternative use for the IVR filter is for position sizing (as mentioned above)...when the IVR is greater than 50%, increase your size.

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Now for the last table...total non-compounded returns by strategy variation.  The non-IVR filtered variations had the highest returns, which is related to these variations having the most trades (100+, see table above).  In general, the trend is for higher returns with higher DTE.

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In the past, I've made fairly granular recommendations on which strategy variations to choose based on a trader's specific risk tolerance and other factors.  This time, I'm going to be more specific, and point out the variation that appeals to me.  Since I use the IVR filter for sizing only, I am most interested in the non-IVR filtered strategy variations.  Based on a number of factors, my preferred variation is profit taking at 25%, loss taking at 75% and DTE in the 55 to 70 range.  Depending on the market, I may push the profit taking level up to 35%, but that would be as high as I'd go.  Also note, that 2015 was an unusually good year for SPX short straddles....not sure I'd expect this higher than normal win rate to continue.

If you want to check out the details behind the numbers shown in the tables above, take a look at my SPX Straddle Summary Page that lists links to all 40+ articles in the series.

It's good to have this series of articles finally finished.  This has been a bear of a blog series to create, at five posts per week.  Even with extensive copy and paste, which I'm sure you noticed :), each post still took in excess of two hours to write.  Now I know my limit!  Going forward, I am going to scale back my posts to no more than two times per week, and write more summary posts rather than detail posts.  Hat tip to Mike at Quantocracy for this suggestion!

Finally, if you like my blog, consider a tax deductible donation via my Movember page...your donation supports men's cancer research: http://mobro.co/dave2015 

SPX Straddle - 80 DTE - Results Summary

Over the last five blog posts we looked at the automated backtest results for 4040 options straddles sold on the S&P 500 Index (SPX) at 80 days-to-expiration (DTE).  Eight different loss approaches were tested on these straddles.  On top of these eight loss approaches, tests were conducted with no profit taking, and profit taking at 10%, 25%, 35%, and 45% of the credit received.

For background information associated with the results in this post, please see the following posts:

• Option Straddle Series - P&L Exits
• SPX Straddle - 80 DTE - No Profit Management
• SPX Straddle - 80 DTE - Manage Profits at 10% of the Credit Received
• SPX Straddle - 80 DTE - Manage Profits at 25% of the Credit Received
• SPX Straddle - 80 DTE - Manage Profits at 35% of the Credit Received
• SPX Straddle - 80 DTE - Manage Profits at 45% of the Credit Received

The results in this post are summarized in six heat map tables.  In these tables, each row corresponds to a different loss exit percentage.  For example, the first row (25) corresponds to the strategy variations where losses were taken at 25% of the credit received.  These rows have values from 25 to 200.  The columns are a little more complicated, and are grouped first by implied volatility rank (IVR) level, and then by profit exit percentage.  You can see that each IVR percentage level contains five columns (10, 25, 35, 45, and NA)...with each column representing a profit taking percentage.  For example, the first column lists all of the strategy variations where the IVR was less than 25% and profits were taken at 10% of the credit received.

The first table shows the average normalized P&L per day by IVR, profit taking percentage, and loss taking percentage. The highest daily returns are concentrated in the IVR > 50% columns, specifically profit taking at 25%, 35%, 45%, and NA.  The 45% profit taking level was clearly the strongest.  So far, the highest P&L per day readings occurred with the 45 DTE variations at 25% and 35% profit taking.  The best 80 DTE reading (1.64%) was the highest across all DTE variations.

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The second table shows the average P&L per trade by IVR, profit taking percentage, and loss taking percentage.  The area with the highest P&L per trade values was IVR > 50%, profit taking at 45%, and no profit management (NA).  Also, as we noticed in the 59 DTE summary post, the trade returns in the IVR < 25% section with profit management at 25%, 35%, and 45% are very good.  The returns in this section at 80 DTE are very strong, and second only to the corresponding section at 66 DTE.

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The third table shows the win percent / win rate by IVR, profit taking percentage, and loss taking percentage.  The highest win rates occur at lower profit taking levels...the lower the profit taking percentage, the higher the win rate for a given IVR grouping.  This highest individual win rates (95%) occur with an IVR > 50% and profit taking at 10%.  This section was also the strongest for the 45 DTE and 59 DTE trade variations.

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In the fourth table, we see the Sortino Ratio by IVR, profit taking percentage, and loss taking percentage.  The highest Sortino Ratios were associated with loss taking at 25% and an IVR > 50%.  The best Sortinos at 80 DTE were lower than the best Sortinos at all other DTE except for 52 DTE.

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The fifth table shows the profit factor by IVR, profit taking percentage, and loss taking percentage.  The largest profit factor values were associated with an IVR > 50%, profit taking at 35%, 45%, and NA, across loss taking levels.

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The last table shows the average days-in-trade (DIT) by IVR, profit taking percentage, and loss taking percentage.  The quicker the profit taking, the shorter the time spent in a trade.  Limiting your losses to 25% of the credit received also took you out of the trades sooner.

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Which variation of the 80 DTE straddle is best?  That depends on your risk tolerance.  If I was going to trade a 80 DTE ATM SPX straddle on a monthly basis, I would gravitate towards the non-IVR filtered version that takes profits at 25% and losses around 100%.  If I just wanted to trade these more opportunistically, then I would look for trades when the IVR is greater than 50%, and manage with profit taking at 35% and loss taking at 100%.  You can find links to all of my SPX straddle articles on the SPX Straddle Summary Page.

In the next one or two posts I will summarize the results of all of the SPX short straddle backtests.


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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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