Time Spread Backtesting 2022 Q1 (Part 3)

Today I continue backtesting time spreads on 2022 Q1 in ONE with the base strategy methodology described here.

With SPX at 4281, trade #3 begins on 3/9/22 at the 4300 strike for $6,718: TD 35, IV 30.2%, horizontal skew +0.3%, NPV 270, and theta 44.

The first adjustment point is hit at 13 DIT with trade down 7%:

One week later with trade down 9%, is this the second adjustment point?

The first adjustment was down 7% and trade recovered to -2% but never turned profitable. I didn’t specifically define “recover” in the base strategy guidelines, but in case it means “to profitability” then I should hold off until -14% for a second adjustment even though the graph suggests we may be on the slippery slope already. Without data from a large sample size I don’t necessarily think either way is wrong: I just need to be consistent.

Profit target is hit 15 days later with trade up 10.34%. Position is almost completely delta neutral at that point (TD = 358).

Thus far, I have covered three time spreads in 2022 beginning on Jan 4, Jan 18, and Mar 9. Let’s look at the rest assuming I enter a trade every Monday (or Tuesday in case of holiday).

With SPX at 4661, trade #4 begins on 1/10/22 at the 4675 strike for $6,528: TD 17, IV 14.7%, horizontal skew -0.8%, NPV 294, and theta 24.

On 8 DIT, first adjustment point is hit after a 2.44 SD SPX move lower with trade down 11%:

Second adjustment point is hit the very next day with SPX down 36 points and trade down 16%:

This adjustment is tricky with SPX at 4541 and current strikes at 4675/4575. If I roll to the nearest ITM strike at 4550, then I have spreads only 25 points apart. I could roll to an OTM strike that is at least 75 points away if not more. I could also close the 4675 spread and stick with one spread for now, but despite increasing TD, this also reduces theta ~50%, which could require staying in the trade much longer. One benefit of rolling to cut NPD by a target percentage (see fourth paragraph of Part 2) would be to eliminate this judgment call entirely.

Speaking of spreads only 25 points apart, I often see a recommendation to adjust (roll) time spreads when the underlying price moves beyond a strike. If the strike prices are extremely close, then another adjustment is almost a certainty and I would have to ask why bother even rolling into such a structure at all?

For our purposes here, I will roll to 4500 to leave at least 75 points between time spreads. That feels comfortable to me, but I have no data to support or oppose it.

Max loss is hit two days later on a 1.58 SD SPX move lower with trade down 20.1%. Staying with a market move of -2.2 SD over 11 days is going to be difficult no matter what the guidelines.

I will continue next time.