SPX Straddle - 45 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 45 days-to-expiration (DTE).  In this fifth 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 45% 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 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 (125:45) variation stood out with the best P&L % / day reading, highest overall P&L %, and the best win rate.  Several of these metrics were the same as other strategy variations.  The second place strategy was the (150:45) variation.

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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.  At this level of profit taking it is difficult to distinguish the trend of increasing P&L with increasing IVR, but it is still evident.

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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.  The lower win rate at the 45% profit taking level makes it difficult to see the trend, since there are nearly as many losing trades as winning trades.

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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 25 DIT.  At the higher loss management levels, 125% and greater, most of the losses were realized at expiration.  This is the same pattern we noticed with the 38 DTE trades using the 45% win management level.

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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 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.  As we've seen with the earlier articles, there are significantly fewer trades that meet the >50% IVR criteria.  The P&L% per day readings and win rates are much higher at the higher loss levels (125%, 150%, 175% and 200%).  We observed this pattern with the 10%, 25%, and 35% profit management also.

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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 45% credit exits (described here) resulted in the equity curves below.  These filtered trades have had a very good run all of 2015, an this trend was present in the 35% profit management level also.

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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 I'll summarize the automated backtest results of the 45 DTE ATM SPX short straddles, before moving on to the 52 DTE straddle series.


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