Backtesting Results Trading Monthly vs. Bi-Monthly Options for 10 Years

In this episode, we use backtesting results take a deeper look at whether it is more profitable to sell options 60 days out or 30 days out from expiration.
Backtesting Results Trading Monthly vs. Bi-Monthly Options for 10 Years
Kirk Du Plessis
Oct 13, 2018

Is less more? We often hear this phrase thrown about with the assumption that, when investing, you should do less, sit on your hands or trade further out, to generate higher profits and better returns. But, is this really the case, and does the math,and data prove this to be true? We wanted to put this assumption to the test with a couple backtested short straddles in IWM and EFA. No filters, no profit targets, no stop-loss orders, just pure option selling strategies. Our goal was to see if trading options 60 days out were more profitable than trading options more actively 30 days out from expiration. All tests were done using a 30% account allocation. 

Back-Testing Studies on IWM

Case Study 1:

  • We ran a test on IWM where we traded naked straddles targeting 60 days to expiration on a weekly basis. 
  • We let the trade go all the way to expiration without management or filters.

Results:

  • A total return of 124% over the testing period
  • Annual CAGR (compounded annual growth rate) of 8.32%
  • The win rate was 69%, as expected.
  • The max drawdown was 53%

Case Study 2:

  • We ran a test on IWM where we traded naked straddles targeting 30 days to expiration on a weekly basis. 
  • Again, we let the trade go all the way to expiration without management or filters - no IV rank, no stop loss, etc.

Results:

  • A total return of 131% over the testing period. 
  • Annual CAGR of 7.73%
  • The win rate was 61%, which was less than expected.
  • The max drawdown was dramatically less at 40%.

The Bottom Line: Trading contracts closer in expiration resulted in a smoother, more stable portfolio with a lot less downside risk. 

Back-Testing Studies on EFA

Case Study 1:

  • We ran a test on EFA trading straddles on a weekly basis targeting 60 days to expiration. 
  • No filters, no IV rank, no stop loss -- we let the position go all the way to expiration.

Results: 

  • A total return of 68.71% over the testing period, more profitable than the S&P.
  • Annual CAGR of 4.36%.
  • The win rate was 63%, in the ballpark of the expected 68%.
  • The max drawdown was 48%--almost identical to the IWM study.

Case Study 2:

  • We ran a test on EFA trading straddles on a weekly basis targeting 30 days to expiration. 
  • No filters, no IV rank, no stop loss -- we let the position go all the way to expiration.

Results:

  • A total return of 71.77%, which is higher than the expected return.
  • Annual CAGR of 7.73%, which is much higher the Case 1. 
  • The win rate was 64%.
  • The max drawdown was 47%, a slight improvement.

The Bottom Line: Trading 30 days out versus 60 days out on EFA showed that we have the same trajectory potentially as what we saw with IWM, on a smaller scale. 

Conclusion

  • Moving your timeline from 60 days out to 30 days ends up reducing drawdowns, smoothing your returns, potentially generating more money, and should end up being more profitable for you in the long-term. 
  • You can improve your chances of generating higher expected returns by making slight adjustments to your strategies. 
  • Being more active in your trading and frequently adjusting your positions ends up generating slightly better returns with less risk. 
  • In all these cases, the strategy actually out-performed the S&P, with only 30% of the account at risk.

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