Time Spread Backtesting 2022 Q1 (Part 8)

I will begin today by finishing up the backtesting of trade #12 from 3/14/22.

The next day is 21 DTE when I am forced to exit for a loss of 16.5%. Over 46 days, SPX is down only -0.09 SD, which is surely frustrating as a sideways market should be a perfect scenario to profit with this strategy. I am denied by an outsized (2.91 SD) move on the final trading day. Being down a reasonable amount only to be stuck with max loss at the last possible moment will leave an emotional scar. If I can’t handle that, then I really need to consider the preventative guideline from the second-to-last paragraph of Part 7 because the most important thing of all is staying in the game to enter the next trade.

One other thing I notice with regard to trade #12’s third adjustment is margin expansion. The later the adjustment, the more expensive it will be. As I try to err on the side of conservativism, position sizing is based on the largest margin requirement (MR) seen in any trade (see second-to-last paragraph here) plus a fudge factor (second paragraph here) since I assume the worst is always to come. This third adjustment—in the final week of the trade—increases MR from $7,964 to $10,252: an increase of about 29%! The first two adjustments combined only increased MR by 13%.

The drastic MR expansion will dilute results for the entire backtest/strategy, which makes it somewhat contentious. To be safe, I would calculate backtesting results on 2x largest MR ever seen. If I position size as a fixed percentage of account value (allows for compounding), then I would position size based on a % margin expansion from initial. For example, if the greatest historical MR expansion ever seen was 30%, then maybe I prepare for 60% when entering the trade.

With SPX at 4454, trade #13 begins on 3/21/22 at the 4475 strike for $6,888: TD 23, IV 20.0%, horizontal skew -0.4%, NPV 304, and theta 39.

Profit target is hit 15 days later with trade up 11.8% and TD 21. After such a complex trade #12, this one is easy.

With SPX at 4568, trade #14 begins on 3/28/22 at the 4575 strike for $5,918: TD 25, IV 15.8%, horizontal skew -0.4%, NPV 274, and theta 24.

On 67 DTE with SPX down 1.81 SD, the first adjustment point is reached:

On 56 DTE, SPX is down 2.50 SD and the second adjustment point is hit:

Despite being down no more than 10% before, the trade is now down 19.2% after this huge move. With regard to adjustment, I’m now up against max loss as discussed in the fourth paragraph of Part 6.

I will continue next time.