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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.

Summary

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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Disclaimer:

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.

All opinions are based upon information and systems considered reliable, but we do not warrant the completeness or accuracy, and such information should not be relied upon as such. We are under no obligation to update or correct any information herein. All statements and opinions are subject to change without notice.

Past performance is not indicative of future results. We do not, will not and cannot guarantee any specific outcome or profit. All traders and investors must be aware of the real risk of loss in following any strategy or investment discussed herein.

Owners, employees, directors, shareholders, officers, agents or representatives of ORATS may have interests or positions in securities of any company profiled herein. Specifically, such individuals or entities may buy or sell positions, and may or may not follow the information provided herein. Some or all of the positions may have been acquired prior to the publication of such information, and such positions may increase or decrease at any time. Any opinions expressed and/or information are statements of judgment as of the date of publication only.

Day trading, short term trading, options trading, and futures trading are extremely risky undertakings. They generally are not appropriate for someone with limited capital, little or no trading experience, and/ or a low tolerance for risk. Never execute a trade unless you can afford to and are prepared to lose your entire investment. In addition, certain trades may result in a loss greater than your entire investment. Always perform your own due diligence and, as appropriate, make informed decisions with the help of a licensed financial professional.

Commissions, fees and other costs associated with investing or trading may vary from broker to broker. All investors and traders are advised to speak with their stock broker or investment adviser about these costs. Be aware that certain trades that may be profitable for some may not be profitable for others, after taking into account these costs. In certain markets, investors and traders may not always be able to buy or sell a position at the price discussed, and consequently not be able to take advantage of certain trades discussed herein.

Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.

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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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