Calendar Backtesting the COVID-19 Crash (Part 2)

I recently viewed an online presentation about a monthly calendar, which motivated me to revisit the strategy.

As mentioned in Part 1, I backtested a second time because my results fell short of the advertised +100% return. As also discussed, I wasn’t overly concerned about this because he did not offer details about his trades or his calculations.

Although I didn’t consider it after completing the first backtest, I probably overestimated slippage with $21/contract. Factoring in too much slippage can result in backtested returns falling short of live-trading counterparts.* I would be curious to know what slippage the presenter realized on his trades. I have a feeling very few actually track this. I do it by noting difference between my limit and midprice. Once my order is executed, I look immediately at the mark to see how far off I got filled.

I did give serious consideration to the fluctuating number of contracts that is typical of rolling calendar trading strategies [beyond the current scope is an entire debate awaiting to be had over this approach]. If I start with one calendar and adjust by adding a second, then I have roughly doubled margin. Trading strategies generally need consistency to be successful. Cruising along winning 1, 1, 1 on single calendars only to suddenly hit turbulence and lose 4 on a[n] [adjusted] calendar with double the margin can be very painful (see third-to-last paragraph here).

In my initial backtest, much of the profitability took place with one contract in place rather than two. Calendars make consistent profits when the market trades sideways. A cursory scan through the backtest shows 288 trading days with one contract and 163 trading days with two. As a weighted average, I was trading 1.36 contracts per day, which is 68% of the full 2-contract position size. I would expect a lower return with a smaller position size because maximum risk (denominator), is equal. Maximum risk relates to the largest position size ever seen whether it happens once, 36% of the time, or always.

In the subsequent backtest, I implemented two contracts at all times. I started with two and rolled one of two when I had to adjust. I paid much closer attention to when trades started and when they ended. Rather than ever having calendars with different expiration months on at the same time (e.g. Jan/Feb and Feb/Mar), I closed the entire position and started a new trade with the short leg around 60 DTE.

I will continue next time.

*—So many other things can also affect the comparison including strike prices, DTE of
     individual trades, timing of adjustments, etc. It’s also worth noting that difference in
     the headline return may not be statistically significant (see bottom of this post).