Is the future really that bright?

I am always looking for consistent credit strategies to feed my Theta farm.

This IWM strategy appears to be good for smaller accounts. It requires approximately $5,000 – $10,000 in capital/buying power to trade.

Swing trading has always been my edge over the years. I have since added backtesting into my tool chest. It allows me to look at certain trades in a different light, tweak what I have been trading, and provide a bit more psychological confidence.

I have run the data through its paces. I have calculated the risk/reward ratios, profit factor, Kelly Criterion, Capital Efficiency Ratio, etc. A shout out to fellow trader David Sun for the work he has done regarding this. His studies have led me to look at backtests with more discerning eyes.

I may end up duplicating the data that others have done. That is a good thing. It only validates what has already been done and may allow different ways to look at / test different strategies.

One has to be careful while using backtesting data. It is easy to milk the data and end up with what you think is the perfect trade. I make sure I use the most conservative settings when I backtest. This typically gives me a lot less profit. Only when I live trade my strategies will the market either reward me or beat me up and tell me I am totally wrong.

This strategy can also be used on RUT from which IWM is derived. RUT is cash-settled and therefore no fear of assignment. It does have some strange schedules though so if you do trade it, take into consideration that there are AM and PM expirations. I think there may also be quarterly expirations.

I currently do not find RUT as liquid as IWM and it has been harder getting out of RUT quickly when I needed to. RUT is 10xs the size of IWM so if you do trade it, adjust accordingly.

I really have no fear in regards to IWM being assigned because I will close it out earlier than its expiration.

Assumptions:

  • Backtests are purely a simulation and not based on live trades. Even though I set the criteria on my simulation at its maximum conservative threshhold, it is not the same as trading live. Live trades require a market maker to process a trade and therefore it may be harder to get in and out of a live trade if there is not much volume. There could also be quite a bit of slippage. That being said, my experience with IWM is that it is fairly liquid in live trading and the slippage has not been an issue. This can and will change in the future.
  • The job of backtesting is to find opportunities that may exist. It is not the holy grail. If you strictly trade based on bactesting data, then you are a fool and not in the Motley Fool sense of the word.
  • The data provided are straight trades with no scaling up. Their is no reinvestment nor compounding.

The Setup:

This strategy requires, at this current price level, approximately +-$1800 in buying power to sell an IWM 10 delta put.

You open a new trade every Friday even if you have others open.

Open:

Sell 1 IWM 10 delta Put 90 days out

Set a stop-loss for 2xs credit received

Exit:

Exit @ 30% profit Target

Exit at 28 days prior to the expiration or if the stop-loss is hit for 2xs credit received

Why I chose a 30% Profit Target

A couple of things that stuck out for me was the max drawdown was minimal in bad years and the average days in the trade is only 14 days. That means nice premiums with less market exposure.

I will most likely scale up in this trade to attempt to collect more daily theta.

Of course, my thought process may change once I start trading this strategy and if the market decides to beat me up.

Here are the stats.

More Stats

I have also cross-referenced 45, 60, 90, 120, 150, and 180 days out.

Here is the current spreadsheet.