Auto-Trader/docs/sessions/2026-10-09_options_strategy_candidates.md

Options strategies worth automating: candidate backtests

Goal: backtest a small set of options strategies with the existing engine (agent/backtest/engines/options_portfolio.py, unchanged) and decide which, if any, to carry forward to paper trading.

Code: agent/src/skills/options-strategy/example_signal_engine.py (engines), agent/scripts/options_candidates_backtest.py (this study; reruns end to end with PYTHONPATH=agent python agent/scripts/options_candidates_backtest.py), agent/tests/test_options_strategy_engines.py.

Bottom line

• No premium-selling strategy qualifies. Cash-secured puts, iron condors and short strangles made between -4% and +4% a year out of sample, against 15–19% for buy-and-hold. The model has no volatility risk premium: options are priced at trailing realized vol, and that premium is where these strategies' edge comes from in practice. This backtest cannot validate them either way. They need real option-chain history first.

• Carry forward one: a 0.20-delta, ~35-DTE covered call on SPY (QQQ as a second underlying). It was the only strategy that matched or beat buy-and-hold on risk-adjusted terms in both periods for the index ETFs:

  • SPY out of sample: Sharpe 1.10 vs 0.94, max drawdown -19% vs -25%, CAGR about the same.
  • QQQ: Sharpe about equal, drawdown -29% vs -35%, about 2 points a year less CAGR.

  Its result doesn't depend on the missing premium: real calls are richer than modeled here, which would help it. It lagged buy-and-hold on AAPL and MSFT (CAGR 4–5 points a year lower), so it is for index ETFs only.

• Don't carry the protective put forward, even though it looks good. Puts are priced at trailing realized vol plus a mild skew, which makes them several vol points cheaper than real index puts. Its strong in-sample result (Sharpe 1.2 against 0.86 for SPY) mostly comes from the cheap pre-COVID puts in February 2020, priced at about 12% vol. In reality those puts cost far more.

• The vol gate helped the strangle in every run: an "elevated" regime (30-day realized vol above its 1-year median) beat no gate in sample. Out of sample it kept drawdowns to 8–19% but still earned ~0–1% a year. The gate's benefit here comes from realized vol reverting to its mean. Real implied vol already prices that in, so don't expect the benefit to carry over.

Setup

Item	Value
Underlyings	SPY, QQQ (index ETFs); AAPL, MSFT (single names). yfinance closes, dividend- and split-adjusted
In-sample	2016-01-04 → 2020-12-31 (includes 2020 crash), history from 2015 used for vol warm-up
Out-of-sample	2021-01-04 → 2026-10-08 (includes 2022 bear market), parameters frozen
Tuning	one parameter per strategy, best mean Sharpe over SPY+QQQ in sample (grid in the script)
Pricing	Black-Scholes on 30-day historical vol, iv_skew=-0.3 smile, r = 2%, European, next-bar-close fills
Costs	commission = 1% of premium per side for ETFs, 2% for single names (≈ half-spread + fees)
Margin	engine's CBOE-style naked margin for cash-secured puts and strangles; off for covered call, protective put and condor (see caveats)
Capital	$100k, size compounds on each strategy's own realized P&L

Strategies (chosen parameters in bold):

Strategy	Rules
Covered call	shares + short call 0.20Δ (vs 0.30), ~35 DTE, hold to expiry, shares re-sized to equity each cycle
Cash-secured put	short put 0.30Δ (vs 0.20), ~35 DTE, hold to expiry, notional = capital (fully secured)
Iron condor	short 0.16Δ (vs 0.10/0.25) put+call, 0.05Δ wings, 45 DTE, close at 50% of credit or 21 DTE; max loss 10% of capital per trade
Vol-gated strangle	short 0.16Δ put+call, 45 DTE, 50% / 21 DTE; gate elevated (vs none / contracting); notional = capital
Protective put	shares + long put 0.15Δ (vs 0.30), ~60 DTE, rolled at 21 DTE

Out-of-sample results (2021-01 → 2026-10)

CAGR+bill is CAGR after crediting the 13-week T-bill rate on cash (the engine pays 0% on cash). It matters for cash-heavy short-premium books.

Strategy	Code	CAGR	CAGR+bill	Sharpe	MaxDD	Worst month	Worst day	CVaR 5% (daily)	Skew	Win rate	Trades
buy & hold	SPY	15.3%		0.94	-24.5%	-9.2%	-5.9%	-2.4%	0.28
covered call	SPY	15.5%	15.5%	1.10	-19.4%	-8.3%	-5.6%	-2.1%	-0.00	81%	59
cash-secured put	SPY	2.9%	5.8%	0.42	-13.9%	-7.3%	-4.8%	-1.3%	-0.16	85%	59
iron condor	SPY	-1.4%	1.6%	-0.18	-14.8%	-4.2%	-2.8%	-1.2%	-0.51	64%	90
vol-gated strangle	SPY	0.0%	3.0%	0.02	-8.4%	-3.2%	-3.1%	-0.7%	-1.61	72%	53
protective put	SPY	15.1%	15.1%	1.07	-20.5%	-8.2%	-3.8%	-1.9%	0.75	14%	49
buy & hold	QQQ	17.2%		0.82	-35.1%	-13.6%	-6.2%	-3.2%	0.15
covered call	QQQ	15.4%	15.4%	0.86	-29.2%	-12.5%	-5.9%	-2.8%	-0.06	73%	59
cash-secured put	QQQ	3.7%	6.4%	0.42	-21.4%	-7.2%	-4.9%	-1.7%	-0.58	88%	59
iron condor	QQQ	-3.1%	0.1%	-0.46	-22.9%	-5.1%	-2.7%	-1.1%	-1.42	62%	90
vol-gated strangle	QQQ	1.3%	4.3%	0.29	-10.5%	-6.1%	-2.8%	-0.9%	-2.37	77%	52
protective put	QQQ	16.7%	16.7%	0.92	-31.0%	-12.6%	-4.1%	-2.5%	0.48	18%	49
buy & hold	AAPL	18.9%		0.77	-33.4%	-12.2%	-9.2%	-3.9%	0.34
covered call	AAPL	13.7%	13.8%	0.67	-32.0%	-11.4%	-8.7%	-3.5%	0.27	71%	59
cash-secured put	AAPL	3.4%	6.3%	0.32	-23.9%	-6.0%	-6.1%	-2.3%	0.62	78%	59
iron condor	AAPL	-4.3%	-0.8%	-0.59	-28.7%	-8.7%	-4.3%	-1.3%	-1.45	66%	90
vol-gated strangle	AAPL	-0.4%	2.8%	-0.01	-15.1%	-9.1%	-4.2%	-1.4%	-1.25	75%	52
protective put	AAPL	17.2%	17.2%	0.79	-29.0%	-12.9%	-6.2%	-3.1%	0.67	16%	49
buy & hold	MSFT	17.4%		0.73	-37.1%	-17.2%	-10.0%	-3.7%	0.54
covered call	MSFT	12.7%	12.9%	0.67	-28.7%	-13.5%	-9.2%	-3.2%	-0.20	78%	59
cash-secured put	MSFT	4.1%	7.1%	0.42	-18.8%	-7.9%	-6.1%	-2.0%	-0.88	86%	59
iron condor	MSFT	-1.5%	1.7%	-0.19	-13.6%	-4.1%	-3.9%	-1.2%	-1.71	67%	91
vol-gated strangle	MSFT	0.7%	4.0%	0.13	-18.5%	-7.0%	-6.6%	-1.2%	-3.53	72%	47
protective put	MSFT	13.7%	13.7%	0.65	-33.1%	-14.8%	-10.0%	-3.1%	1.03	22%	49

Win rate is per structure (all legs of one entry), excluding the share leg. No opens were rejected for margin in any run.

In-sample (2016 → 2020), chosen parameters

Strategy	SPY CAGR / Sharpe / MaxDD	QQQ CAGR / Sharpe / MaxDD
buy & hold	15.5% / 0.86 / -33.7%	24.5% / 1.11 / -28.6%
covered call 0.20Δ	13.7% / 0.85 / -32.7%	20.2% / 1.07 / -27.6%
cash-secured put 0.30Δ	-1.2% / -0.02 / -33.1%	1.1% / 0.15 / -26.8%
iron condor 0.16Δ	-2.8% / -0.32 / -26.9%	-3.1% / -0.38 / -26.5%
strangle, elevated gate	1.0% / 0.18 / -18.2%	3.1% / 0.48 / -12.3%
protective put 0.15Δ	15.8% / 1.20 / -14.4%	23.0% / 1.31 / -18.9%

The full in-sample grid (every parameter, worst month/day, CVaR, skew) is printed by the script.

Tail behavior

• Short premium has the expected left tail. Every short-premium book has negative daily skew, worst at -5.3 for the ungated SPY strangle in sample. In 2020 the SPY cash-secured put lost 16–17% in its worst month, and the ungated SPY strangle lost 14%. Win rates of 80–90% sit alongside negative CAGR, so a high win rate is no evidence of an edge here.
• The covered call keeps almost all of the underlying's crash exposure: its in-sample max drawdown is -33% against -34% for SPY. It mainly gives up upside, which is why it lags on strongly trending single names.
• The protective put is the only strategy with positive skew, and it cut the worst day on SPY, QQQ and AAPL. That benefit is overstated for the reason given in the bottom line.

Sensitivity to the smile (SPY, out of sample)

iv_skew is the only setting the engine has for how rich OTM options are. Changing it barely moves the ranking:

iv_skew	covered call Sharpe	CSP CAGR+bill	condor CAGR+bill	strangle CAGR+bill	protective put Sharpe
0.0	1.15	5.1%	0.9%	3.9%	1.18
-0.3 (base)	1.10	5.8%	1.6%	3.0%	1.07
-0.6	1.04	6.4%	1.5%	2.7%	0.95

Caveats

1. Prices come from a model, not from real option chains. Every price is Black-Scholes on trailing 30-day realized vol plus a fixed quadratic smile:
   • The volatility risk premium is effectively zero. Real index implied vol has averaged a few points above later realized vol. That gap is the return premium sellers collect and buyers pay. Here, premium selling looks worse than it is and option buying looks better.
   • Real implied vol jumps the day a crash starts. Here it lags by up to 30 days: options are cheap going into a crash and expensive after it.
   • The bid/ask spread is modeled as a flat 1–2% of premium. Real spreads widen sharply in a crisis, the exact days that matter for short-premium strategies.
2. There is no early assignment and no share delivery. Options are European and settle in cash. The covered call and protective put hold a "share replica" (a call struck at $0.01) and re-size it to equity each cycle, which approximates assignment and re-buying. The cash-secured put settles in cash, so it is not a full wheel (no calls written on assigned shares). Dividends reach the results only through adjusted closes.
3. Some margin was switched off. The engine margins every short leg as naked. That is right for cash-secured puts and strangles. It overcharges covered calls and defined-risk condors, and it rejected single condor legs in a trial run, which left the rest of the condor naked. So those three were run with margin_enabled: false:
   • the condor is sized so its maximum loss is 10% of capital, which matches the Reg-T spread requirement;
   • the share-based strategies hold about zero cash.
4. Cash earns 0% in the engine. The CAGR+bill column adds T-bill interest after the fact, as simple interest on the engine's cash balance.
5. This is a small study. It covers four underlyings, about 11 years, and ~50–90 trades per strategy per period. The parameter grid is deliberately small (2–3 values), so the in-sample choice gives only a little room for overfitting. A Sharpe ratio measured over ~5 years has a standard error of about 0.45, so none of the Sharpe gaps above are statistically significant.

Next steps

• Paper-trade the SPY 0.20Δ / 35-DTE covered call (QQQ optional). Record real fills against the model's mid price to measure the actual spread cost.
• Before paper-trading any short-premium strategy, replace the synthetic pricing with historical chain IV, for example by loading an IV series in place of historical_volatility. That is the input that decides whether the cash-secured put or the vol-gated strangle has an edge. This study can't answer that.