Wednesday, April 10th 2019
How To Find the Best Options in Backtesting
How to find the best options meeting multiple parameter criteria like days to expiration, delta or out of the money percentage and spread yield.
This article explains how to select the best option when backtesting or scanning given your parameters. ORATS uses a scoring system to choose the option with the least difference from the ideal, based on how far each option is away from the ideal as a proportion of the range of the minimum and maximum. The article provides an example of how to use the scoring system with three parameters: days to expiration, delta, and spread yield.
If you are wondering how to select the best option when backtesting (or scanning) given your parameters, then this is the article for you.
ORATS uses a sophisticated scoring system to choose the best option based on the parameters. We measure how far each option is away from the ideal as a proportion of the range of the minimum and maximum. We score each parameter based on how far the actual is from the ideal divided by the range of the min and max.
We choose the option has the least difference from the ideal, the lowest score.
The score is calculated as:difference = actual option reading - ideal criteria inputrange = Max criteria input - Min criteria inputscore = sum of all ideal's(abs(difference)/range)
For example, let's say you have three parameters: Days to expiration, delta, and spread yield used to identify the options you want. You have entered the following Ideal, Min and Maxes for the parameters:
criteria Ideal Min MaxDTE 20 15 25delta .2 .15 .25spYield -.02 -.01 -.03
Here are two options that match your parameters and how we choose the best:
option1 DTE 17, delta .17, spYield -.017DTE = 3/10 = .3delta = .03/.1 = .3spYield = .003/.02 = .15score (sum) = .75
option2 DTE 22, delta .22, spYield -.29DTE = 2/10 = .2delta = .02/.1 = .2spYield = .009/.02 = .45score (sum) = .85
Since the score of the first is less, then choose option1.
You might like this article next: How To Calculate Backtest Returns
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