Backtesting
Wednesday, August 7th 2019
New Backtest Feature: Enter Trades Based on Premium Divided by Strike Difference
Enter options spreads based on the premium of the trade divided by the strike difference.
Summary
A new backtest feature allows for entering options spreads based on the premium of the trade divided by the strike difference. By comparing different premium levels, traders can analyze the effectiveness of their trades. The feature is demonstrated using sector SPDRs and short put spreads, with the results showing that the 25% strike difference annual return of 1.48% worked better than the 10% kind returning -1.06%. Premium to strike difference is a useful tool to add to strategy analysis.
For spread strategies, you can now define the premium compared to the strike difference for trades you want to enter. For example, if you trade a short put spread, you may want to compare the results of trading a premium level of 10%, 25% and 40% of the strike difference.
Here's how you set up the backtest for this comparison.
I used the sector SPDRs in the Symbol section, Strategy is Short Put Spread, Days to Expiration ideal is 30, deltas are -0.30 and 0.15, and the Entry Strike Diff Percentages of -10%, -25% and -40%. Here's the -40% min/max.
You won't find many short put spreads meeting the 40% of strike difference in SPDRs as evidenced by the many zeros in the monthly returns.
However, the 25% and 10% were in trades nearly 100% of the time back to 2007.
Here, the 25% strike diff annual return 1.48% worked better than the 10% kind returning -1.06%.
Here's a trade example at 10% premium to strike difference. The net premium is $0.202 and the strike difference is $2 or 10.1% premium to strike difference.
Premium to strike difference is a nice tool to add to your analysis of strategies. Give it a try and backtest for free today: Free Trial
You can also exit on strike difference. https://blog.orats.com/backtest-exiting-an-options-spread-with-price-divided-by-max-profit
Disclaimer:
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