Today we wanted to use our new options backtesting software under our Trader's Toolbox to run some credit spread backtests on DIA. Namely we were trying to determine if selling options during higher implied volatility markets actually generates a higher net credit for the position or not? Plus, we tweaked the allocations just a bit as well to see how different positions sizes impacted returns, drawdowns, and Sharpe ratios.
Key Points from Today's Show:
Weekly Put Credit Spread in the Dow (DIA)
- Tested an average of 50 day expiration with an overall allocation of 50%.
- Had a minimum IV rank of 50, and a 50% profit target exit.
- No stop loss level.
- Entered all of the spreads on the 40 Delta on the put side - selling options really close to the money and buying options 5 strikes away.
- Very bullish and aggressive spread.
- Lost 71% over the entire period.
- Loss was experienced in the front side, early on in the cycle.
- Could not recover from this huge drawdown early on.
- Average premium collected was $150 for each credit spread.
- The average return for the trades was 13.99% per spread.
- Removed the minimum IV rank threshold, making trades as often as possible, regardless of IV.
- Reduced the overall allocation down to 20%.
- Everything else was kept the same.
- Lost 4% overall and the Sharpe ratio improved by 20 basis points.
- Maximum drawdown reduced from 93% to 68%.
- Slightly better win rates and entered more trades.
- Average premium collected was $117, which shows that higher IV pays more.
- The average P&N percent with low IV was 7.18%, two times lower than when IV was high.
- Options trading cannot simply be one-size-fits-all.
- You have to be dynamic in both the strategies that you choose and the aggressiveness or position sizes that you have for those setups.
- Realized that our trading needed a more consistent strategy during times of low IV because it pays to be active during low IV.
- Need to take the best of both approaches, low and high IV, and combine them together to create a more dynamic portfolio.