Everybody loves a rising balance. Well, folks, this strategy keeps moving up and up. That's why I am happy to call it Calendar to heaven. And we will be giving away some of the secret mixes(even to those of you who are not Led Zepellin's raving fans or too young even to know the band.)
At the end of the video, I will be sharing the link to the backtest so you can look at the study in detail.
Without further due, let's jump right into it. I present to you the Calendar to Heaven. Calendars are a very peculiar Option breed; They involve combining contracts with different expirations at the same strike.
To build one, we start by selecting the short contract at the desired Delta. In this case, we are going to use a Short Put at fifty deltas. This short Put will have eight days to expiration. So a brief duration for this first contract. We will be adding a second contract. This time a Long put at exactly the same strike.
To accomplish this in our eDeltaPro backtesting software, we need to do a little trick. First, we add a long put. Second, we double click it; third we anchor the long contract to the short one. This link between the two contracts will ensure that the strike of the dependent Put will always be at a fixed dollar amount to the strike of the first contract. Using this feature, we can build, for example, a fixed-width spread, like a five-dollar width vertical.
For the heavenly Calendar, we are going to set the fixed width at zero dollars. In that way, we are assuring that the Long contract will always have the same strike as the Short one.
With the individual configuration still open, we are going to set the duration of this long contract. We want the duration to be 28 days to expiration or 28 DTE. When we have a test with contracts on different durations, we need to tell the algorithm when to close the trade. For this study, we will close the trade using the front "month" expiration. That is the expiration of the contract with the shortest duration. In this case, we are closing the trade on the eight DTE expiration.
Our Calendar will use the SPX index, and we will run this test over the last three-year period.
SPX options are also peculiar. They do not get assigned, and the weekly and monthly expiration settlement values function differently. For that reason, I recommend closing the trades one day before they expire and avoid all the complexity and gymnastics associated with the settlement value calculation. So let's fill the exit condition with one DTE.
We ask the software to trade daily. So that the algorithm will establish a new position every single trading day, this will increase the number of occurrences and improve the empirical relevance of our study.
We are going to leave all the other options at their default value.
We now have our basic configuration. Let's run the backtest. We can see the detailed results on the lower part of the backtest page or the mini cards on the right.
Let me show you the results.
As you can see, this strategy shows a nice consistent uptrend over the last three years. And although the winning rate is not very high, the fact that the losses are pretty restrained in size allows the strategy to produce systematic positive results.
One of the beautiful things about this strategy is that the short Put ensures that you get a positive return if the underlying price goes up. At the same time, if prices go down, you can expect the volatility to rise, thus increasing the value of the Long contract. That is why I like to say that the Calendar has a built-in hedge, sort of self-contained insurance against downturns. That is why I love this Calendar; the performance, even on downtrends, is still positive.
Knowing that this strategy profits from increases in volatility, we may want to avoid trading it during high relative implied volatility, That is when IVR is high. So we are going to make this adjustment and test it to see if it works.
We are going to use the group feature in this video. This one of the most useful features of eDeltaPro Options backtesting software. It allows us to make several continuous adjustments and save the whole sequence of tests. One click, and we will be able to compare several backtest in one single table.
Testing a Stop Loss
We tested another adjustment, a stop loss. And even if we tested different stop-losses levels during different periods, we found no evidence of a stop loss significantly improving the performance of our Calendar.
On the other hand, we are closing early when 20 to 30% of max profit is reached resulted in improved profitability, less time exposed to the market, and an increased P&L per day.
So here is the final set-up for the Calendar to heaven:
- Short Put at 50 Delta, 8 DTE.
- Long Put at the same strake as the Short Put, 28 DTE
- Trade daily.
- Trade only when IVR is low, less than 30%.
- Exit the positions if you reach 20 to 30% profit.
- No stop loss necessary.
Folks, I hope you enjoyed this video and found the Heavenly Calendar as compelling as I do. You can start trading this strategy right away. And remember, test before you trade.
Here is the link to the backtest to see the results in detail
The Basic Backtesting Workflow. How to setup and optimize a study based on empirical historical data. Step by step explanation with a real-life example.