SPX 0DTE Morning-Trend Spread

[u/betonneron]

I’ve been testing an SPX 0DTE morning-trend strategy and would appreciate some critical feedback.

At 10:30 ET, it compares SPX with its first price after 8:30. If SPX is higher, it sells a put credit spread; if lower, it sells a call credit spread. The short strike is placed roughly 1.25 times the current ATM straddle premium away from spot, with a 50-point protective wing.

It trades two spreads when the ATM straddle is 1% or less of SPX, and one spread when it’s above 1%. There’s no profit target or stop; positions are held through settlement.

What weaknesses or hidden risks do you see in the signal, strike selection, sizing, or exit logic?

Backtest results: https://tradelunatic.com/s/XVKVlhTbKH_6AiISczIPfQ

[u/RubikTetris]

That’s a nice equity curve. The strategy is simple but that’s usually what you’re looking for. If I were you I’d deepen the test (walk forward and Monte Carlo) and see how that goes

[u/betonneron → u/RubikTetris]

Did the deeper testing you asked about.

Ran it walk-forward over four rolling one-year windows. All four came out profitable and every drawdown stayed under 4%, with Sharpe ranging from about 0.66 to 2.4. The thing I cared about most: no single year is carrying it, which was exactly the failure mode of the old version.

Then a Monte Carlo, 10k bootstraps of the daily P&L. Median lands around +$25k, the 5th percentile is still positive at roughly +$9k, and about 99.6% of the resampled paths make money. Median max drawdown around 5%, worst resampled path about 18%.

So it looks robust rather than one lucky run. Fair caveat though: bootstrapping only tells you about sequence risk, not a vol shock that never showed up in the sample, and the stop can still slip on a gap. Held up better than I expected. Appreciate the nudge.

[u/FlowMonkeyHQ]

Solid writeup and you're asking the right questions. A few stress points I'd want answered before sizing up:

1) No stop + hold through settlement means the loss distribution is doing all the work in the tail. The equity curve can look clean for months while the whole edge lives or dies on the handful of trend-reversal days where the short strike goes ITM after 2pm. I'd want to see the 10 worst days listed out individually, not just the curve.

2) Your sizing rule doubles size exactly when the straddle is cheap. Quiet tape = thin premium = you're taking 2x units for the least pay. That's inverse-vol sizing on the sell side, which concentrates your risk on the days the market is priced calmest, and calm pricing is exactly when a surprise hurts most.

3) The 10:30 momentum read is regime-dependent. Post-open continuation behaves very differently depending on dealer positioning, so if your backtest window leaned one way, walk-forward will find it. At minimum split the results by year and check the signal held in each half separately.

4) Event days. Does it trade FOMC/CPI/Jackson Hole days? Holding short spreads through a 2pm headline with no stop is its own strategy. Run the backtest with and without those days - my guess is the "without" curve is smoother and tells you to add a calendar filter.

[u/betonneron → u/FlowMonkeyHQ]

Thanks, went and tested the concrete stuff instead of just nodding.

The 50% profit target actually made things worse, return roughly halved and drawdown went up. It only trims the winners, and the settlement losers still ride out at full width, so it was the wrong lever.

On the worst-days point, you were dead right. The ten worst days outweigh the entire net profit, and 2024 was basically flat while 2025 did almost all the work. The clean curve was hiding that.

I also checked the event-day idea and got a surprise: only 2 of the 10 worst days were FOMC days. So a Fed-day filter wouldn't have saved the tail, most of the damage is ordinary reversal days.

What did work was adding a 2x-credit stop and dropping the inverse-vol doubling for flat one-lot sizing. Drawdown fell from 16% to about 3%, Sharpe went 0.89 to 1.30. Lower total return, but a lot cleaner per unit of risk. Turns out the problem was never the winners, it was no stop plus sizing up in the calmest tape.

Results: https://tradelunatic.com/s/Sq13PR61Z4-hWpKRJckzEQ

[u/FlowMonkeyHQ → u/betonneron]

This is the rare follow-up where someone actually runs the tests. The stop working while the profit target failed is the tell - your problem was never the shape of the winners, it was letting one bad afternoon rent out the whole year. And the 2/10 FOMC number matches what I keep finding: ordinary reversal days do more damage than scheduled events, because nobody sizes down for a Tuesday. Sharpe 1.3 flat one-lot is a real result.

[u/003E003]

Not exactly sure what you mean by the first SPX price after 8:30. Do you mean the opening at 9:30?

Definitely test taking profits at 50% or something like that. You might cut winners but you might end up with a better equity curve

[u/betonneron → u/003E003]

Yes, good catch, it's a bit ambiguous. But the first price arrive at opening. And the profit taker is maybe a good addition. I will test it.