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Tuesday, May 14th 2019

Backtest Basics: Spread Yield to Define Amount Paid or Received on a Trade

Spread Yield controls the price of the trade to the stock price (spread yield = price paid / stock price). A credit, produces a negative spread yield.

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Summary

The Spread Yield parameter controls the relative price of a trade to the stock price, with a negative price paid or credit producing a negative spread yield. To determine the minimum spread yield for a short put spread, run a backtest without using the spread yield, download the trades, and calculate the average percentage yield. For a long calendar diagonal, set the leg strike widths wide and use the backtest to pick the best matching trade. Orats offers a backtesting service with various pricing options.

The backtest entry criteria called Spread Yield is a powerful parameter that controls the relative price of the trade to the stock price (spread yield = price paid / stock price). A negative price paid or receiving a credit, produces a negative spread yield.

For a traditional short put spread, first, I like to run a backtest without using the spread yield, download the trades, and get a feel for the average percentage the trades in the backtest are yielding. Do this by downloading the report output and opening the StrategyOutputs StrategyTrades.csv as show in this blog post. Add up the amount received for each trade and divide by the stock price. If the average is 1% and the minimum is 0.3% and maximum is 3%, you might want to set a minimum on the spread yield of -.005 (indicating -0.5%) the least amount of credit spread yield percentage you would want to receive.

We had a question from a customer about how to set up a long calendar diagonal for a credit. This involves adjusting the strike leg relationships since we define a long calendar as the same strike with different expirations.

Here's the NDX Long Call Calendar that you can see by clicking here and if you click Edit and Submit the backtest will save to your backtests: https://wheel.orats.com/backtest/1Q55EpN2K1yW7RTxcxHERtdLMhSH6L8K1q

Go to wheel.orats.com to try it out!

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.

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The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors. For more information please see our disclaimer.
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