0 DTE SPX Width PCR Profit Projection Comparison

This post is not exactly backtest but more of statistics analysis and projection. So it's gonna be a lot of numbers to go through. Before I go into the numbers I want to journal down some background context and understanding first.

Background

The background of this ties back to the 0 DTE tranches strategy I posted which currently the default width is 30 wide. There's this question about why not wider/narrow spread but this question not only involves the win rate or profitability which actually results to Premium Capture Rate (PCR). It also involves buying power (margin) as narrower spread means you can do more contracts with the same total buying power. So it boils down to 3 main variables, PCR%, Credit and Spread Width.

As we might not get accurate backtest to modifying those variables, what I'll be doing is to calculate all the possibilities for each set of variables. And to keep it as realistic as possible I used some portfolio sizing assumptions as it involves compounding over months.

Portfolio Assumptions

NLV = $60,000 - this is so that all the 3 width (15, 20, 30) fits into the multiples for start
Risk % = 50% - I set it as we only use 50% of our NLV as buying power for the strategy
Days per month = 20 - I also assume we have everyday 0 DTE for this projection, just to get more quantity.

Projection Sample

Above is the sample of 1 configuration which is the base:

20% PCR / $0.8 Credit / 30 Wide

The main value we want to get from here is the NLV at the end of 12 months. So for each configurations I will capture that NLV.

This is all the NLV for all combination. Note that $0.8/15 wide is not realistic because we would not be able to get the same credit when reducing the width. So I did $0.5/$0.6/$0.7 for the 15 width projection. Similarly, I did $0.6/$0.7 for the 20 width projection.

Seeing that many numbers is hard to visually identify which is better, so I calculated the percentage annual gain instead.

The objective of this comparison is to see if we do narrower width, which increases the contracts when using the same buying power. Would we get a better annual percentage return. This also involves the factor on reducing the width might reduce the PCR as well, hence the range of PCR used.

For example, if 30 wide gives 20% PCR, 15 wide might only get 17% PCR. This is just my assumption, I do not know how much will it affect the PCR%. That's also why I run through the range of 17% to 20% PCR.

But the PCR difference is too minor to surface even if we run backtest on them, that's why I did this projection estimation instead.

Conclusion

So how can we interpret that table.

An example is - We get 86.32% annual return from $0.8/30 at 20% PCR. If we do $0.5/15, even if we only get 17% PCR we still will get 93.64% annual return.

Note that the objective here is purely estimating annual return projection based on the 3 variable. There are other nuances that are not considered such as slippage, fees and most importantly leverage. By doing narrower width with more contracts actually increases leverage significantly. This will also lead to larger drawdown when a stoploss with larger slippage is hit.

Some other related configuration to the trade mechanics may also be changed to further refine the outcome. Example the stoploss % for 15 wide might be more efficient if reduced. All these are also possible variable that can affect.

So it's really just a relative comparison to simply see whether is it worth it to do narrower width.

I'll start to observe if the same strike that I'm doing 30 width that gets $0.8 credit, can I get $0.5-0.7 credit out of it. If I consistently sees $0.6 for a period of observation, I may start trying out $0.6/15 in parallel for comparison.