Time Spread Backtesting 2022 Q1 (Part 2)

I just got done watching King Richard. Like Venus Williams in the movie, we can’t win them all. We don’t have to win them all, though, to have tremendous success. I think we’ll find this to be true with regard to Q1 2022 time spreads.

With SPX at 4569, trade #2 begins on 1/18/22 at the 4575 strike for $7,648: TD 27, IV 20.1%, horizontal skew -0.4%, NPV 336, and theta 30.

Three trading days later, a 1.58 SD move lower gets us to the first adjustment point down 13%:

Adjustment may be done a couple different ways. Creating the new strike ATM will maximize theta but cut NPD less. Alternatively, I can aim to cut NPD by a target amount (e.g. 50-75%). Placing the new strike farther OTM in this way will boost TD at the cost of a lower position theta, which means more time in the trade in order to hit PT. Whether either is better depends on statistical analysis of a large sample size. That’s precisely why I seek the Python backtester.

This adjustment lasts just over one month until the second adjustment point is reached down 14%:

Moving ahead two weeks, is this the third adjustment point?

Unlike the second adjustment, trade is now up 4.6% with TD = 8.

I generally feel it more important to adjust when down money especially if moving onto the “slippery slope” portion of the T+0 curve. Such is not the case here. Another approach would be to trigger off trade drawdown rather than net PnL%. That is, if trade is up 8% and then falls to +1%, consider adjustment since it now registers a 7% drawdown from +8%. Again, whether any of these are better depends on statistical analysis of a large sample size, which is why I seek the Python backtester.

This particular trade is a winner either way. Without adjusting, PT is hit the very next day (49 DIT). With adjustment, PT is hit six days later. Adjustment costs me five days, but even at 55 days, a 10% profit is over 60% p.a.

I will continue next time.