Put Credit Spread Study 1 (Part 1)

After less than two months (personal record!) I now have initial data to present for put credit spreads.

The arbitrary parameters are as follows:

     –Sell first strike < 0.30 delta (less fudge factor for OV inconsistency)
     –40-point spread width
     –Exit at 7 DTE or 1 DTE
     –Stop-loss (SL) levels -25% or -50% based on net margin
     –Transaction fee (TF): $0.26/contract

This is a daily backtest using 3:30 PM ET data from 1/2/2001 – 6/21/2017 (4,136 trades). When the OV database was incomplete I went to 3:00 PM or 4:00 PM and/or filled in with theoretical values.

Margin requirements (MR) for credit spreads may be presented as gross or net. Net MR subtracts initial credit received from spread width multiplied by 100. This makes for larger winners and losers on a percentage (ROI) basis compared to gross MR and therefore increases standard deviation. I evaluated trades based on net MR.

Remembering my previous discussion about TFs, I recalculated results for $0.16/contract and $0.06/contract. One further consideration is that some losers near SL cutoffs might become winners (e.g. decreasing TF by $0.10 equates to an improvement of 1% in ROI on gross margin). I did not include the flips in the performance calculations.

Results of the backtest will be presented in forthcoming tables with bold type reflecting the best values (most positive for winners and least negative for losers) for each performance metric (row). Average Trade is mean ROI across all trades. SD is standard deviation. PF is profit factor. SD in the penultimate row of each table is calculated across all trades. The last row (Avg Trade/SD) is a risk-adjusted return.

The performance metrics were calculated for six (columns) exit combinations. 7-DTE ROI reflects trades closed with seven days to expiration. Exp ROI includes trades closed on expiration Thursday (1 DTE). 7-DTE ROI w/25% SL tabulates the first value of MAE to exceed 25% or ROI at 7 DTE if the threshold is never breached. Exp ROI w/25% SL uses Exp ROI if that 25% threshold is never breached. 7-DTE ROI w/50% SL tabulates the first value of MAE to exceed 50% or ROI at 7 DTE if the threshold is never breached. Exp ROI w/50% SL uses Exp ROI if that 50% threshold is never breached.

I will present the tables next time.