Thursday, July 11th 2019
Backtest Exiting an Options Spread with Price Divided by Max Profit
Backtest Exiting an Options Spread with Price Divided by Max Profit or the difference in the leg strike prices.
This article discusses how to backtest exiting an options spread when the current market price is too large or too small relative to the max profit. The backtester allows users to set the min and max price divided by max spread profit using the "Exit Strike Diff %" parameter. The article provides instructions on how to set this up and includes a link for further reading and a free trial.
There may be a time when the current market price of a spread is so large or so small relative to the max profit when you will want to exit the trade.
For example, if you have a long put butterfly that is $3.00 strike points wide and the price is $2.70. In that case, you may want to exit early since all you can make more is $0.30 and you can possibly lose the $2.70, or 90% of the strike difference.
In our backtester, you can set the min and max price divided by max spread profit using the "Exit Strike Diff %" parameter. In this case you would exit if the Max Exit Strike Diff % of the price/strike difference is greater than 0.9
Here's how to set this up:
Select Long Put Butterfly in the strategy dropdown and the default parameters for days to expiration and delta of the legs will populate. In the Exits section enter a max of 0.9 and in the Leg Relationships section enter the width of the Leg1 strike minus Leg2 strike you want.
In the case of a put butterfly the Leg1 strike minus the Leg2 strike in our defaults is negative and populated that way, i.e. our default 'L1 L2 Strike Width' is null | -2.
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