Short put results
Since 2007, 30 DTE 40 Delta SPY Short Puts held to expiration and 100% notional size (i.e. cash backed) have achieved the following results:
Average return: 6.85%
Annual volatility: 9.1%
Maximum drawdown: 36.5%
Sharpe ratio: 0.75
81.7% of the trades were winners.
Short Put Spread Results
Since 2007, 30 DTE 40/30 Delta SPY short put spreads held to expiry and had a notional size of 100% (same position size as the short put) had an average annual return of 1.1% per year on a annual volatility of 2.4%. The maximum drawdown was 11.1%. 76.1% of the trades were winners.
The results show that short puts had both higher returns and risk-adjusted returns than short put spreads. The long put associated with the short put spread has a negative impact on both the absolute returns and the risk-adjusted returns. For example, if we calculate the Sharpe ratio as the average return divided by the annual volatility, we get 0.64 for the short put and 0.46 for the short put spread. To adjust the put spread so that it has a risk comparable to that of the short put, you can sell 4 put spreads per 1 short put. What do these historical results look like?
Short put spread with a notional size of 4x (4 put spreads per 1 short put)
Average return: 4.5%
Annual volatility: 9.6%
Maximum drawdown: 43.6%
Sharpe ratio: 0.46
The short put spread increased in position size and exhibited similar annual volatility as the short put still had poorer risk-adjusted returns. This is the price to be paid for a defined risk trade and makes sense when we consider put options as the equivalent of insurance. When we expand a short put with the purchase of a long put, we add an insurance-like position to our trade that limits how much money we can potentially lose. Over time, the expected return on this insurance is negative. Because of this, I personally prefer the simplicity of the short put over the added complexity, slippage, and commissions of the put spread. The same is true if we add calls where I personally prefer short chokes over iron condors.
If we compare the credits received, this is what I find from April 21stst 2021 when I look at SPY options that expire in 30 days.
40 Delta Put (Strike: 411): $ 5.37
30 delta put (strike: 405): $ 3.88
A short put would bring in $ 5.37 in premium while the 40/30 delta put spread would bring in $ 1.49. 4 contracts of the spread would bring in $ 5.96, which is slightly more than the short put. This fact can lead traders without access to backtesting to prefer the put spread. Another consideration is the strike selection of the long put in the put spread. My tests in ORATS show that the closer the long put is to the short put, the worse the risk-adjusted results get. This makes sense because the further away the long put is, the less impact it will have on trading.
Traders often wonder whether it makes more financial sense to trade a short put or more contracts with a short put spread. ORATS backtesting data shows that short puts have higher risk-adjusted returns than short put spreads. I’ve found this result to be robust to several underlying symbols in addition to SPY. If you’re trading on a small account, a short put spread can still be useful to control your exposure as a short put always requires more capital than a put spread, but as your account grows to a point where you have enough capital to trade short puts. Your expected risk-adjusted returns improve with a short put. For this reason, we use the short put as the preferred option trading in the Steady PutWrite strategy. It’s both simple and effective in the long run.
Jesse Blom is a licensed investment advisor and vice president of Lorintine Capital, LP. He is advising clients in the US and around the world on the plant. Jesse has been in the financial services industry since 2008 and is a CERTIFIED FINANCIAL PLANNER ™ Professional. Working with a CFP® expert is the highest standard for advice on financial planning. Jesse holds a BS in Finance from Oral Roberts University.