Calendar Backtesting the COVID-19 Crash (Part 1)

I recently saw a presentation extolling the virtues of a monthly calendar trade. I have backtested calendars in the past without convincing results. After seeing this presentation, I decided to give another look.

The presenter claimed to be a full-time trader for several years. He said he has now traded calendars for at least two years. He traded through the COVID-19 crash and did well. This gives him the confidence to trade calendars in any environment because March 2020 was “the worst thing to happen to the market since 9/11.”

These are his official guidelines on trade setup and management:

• Buy calendar 60-80 DTE with long leg 30 days farther out in time.
• NPD < 30% of NPT
• If NPD too high/low, buy second calendar ATM to form a DC.
• Manage by TD ratio and maintain position under profit tent.
• Profit target: 15-20%
• Exit around 30 DTE (no later than 21 DTE).

My initial backtest guidelines were as follows:

• Buy ATM PCal with ~60 DTE and one month between legs.
• Monitor TD ratio daily and adjust if < 4.
• Adjust by adding second calendar ATM or slightly OTM to raise TD > 4.
• If TD < 4 again, close OTM calendar and continue.
• If adjustment results in “excessive” sag between strikes, then reposition with 60-DTE ATM calendar.
• Rinse and repeat should further adjustments become necessary.
• Exit no later than 21 DTE.
• Assess $21/contract to include $0.20 slippage and $1 commission per contract.

From 12/23/2019 – 10/29/2021, this returned $5,072 on maximum risk $7,775: +65.2%. Over the period, SPX ↑ 42.4% from 3225 to 4594. Max drawdown was -47.4% (-$3,684) on 3/23/20 compared to -31.7% (2203) for SPX on the same date.

The calendar strategy performed comparably (risk/return) to the underlying index, but the presenter said he returned +100% in 2020 alone. Did I do something wrong?

I should never get overly concerned about discrepant performance statistics when I do not exact details about presenter calculations or accuracy. He may have rounded up to 100%—to the nearest 1%, 10%, or 100%!

While I don’t know these details about the presenter, a more detailed look at my methodology reveals:

1. I managed only by TD—not minding whether trade remained under the tent.
2. I usually closed at 21 DTE and adjusted as late as 24 DTE.
3. I did not implement a profit target.
4. I opened trades near 60 DTE going as short as 56 DTE.
5. I used only 25-point strikes.
6. I conducted one long campaign rather than grouping entries and exits into separate trades.

When others present results, I seldom find them forthcoming with a comprehensive, accurate account of methodology enabling me to replicate/verify the numbers. Changing any of these details can affect performance calculations. Live trading results are even worse because some degree of discretion is almost always present. A list of trades can provide opportunity for verification, but this was omitted as well.

I will continue next time.