Thursday, September 19th 2019
How To Backtest A Covered Call With A 75 Delta Exposure
Combine a short call with long stock to create a buywrite / covered call with a certain equity exposure delta.
This article explains how to backtest a covered call strategy on the SPY with a delta-hedged equity exposure of 0.75. The process involves setting up a short call backtest, delta hedging the call, backtesting SPY LongStock, and combining the strategies with a 75% weight on long stock and a delta-neutral short call. The resulting equity exposure will be 75 delta.
We were asked, "Can I backtest a covered call strategy on the SPY where the equity exposure is delta-hedged daily to a specific delta e.g. 0.75."
Yes, you can.
First, set up the short call backtest and delta hedge the call. This will have a zero equity exposure.
Next, backtest SPY LongStock.
Finally, in the backtest view, select both strategy check boxes and combine the strategies with the following weights:
Assign 75 percent weight to long stock and combined with a delta neutral short call the resulting equity exposure will be 75 delta.
The result will be a delta neutral short call plus a 75 delta SPY long stock.
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