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Thursday, March 25th 2021

Options Trading Strategy Development And The SafeDayTrading Podcast

Options strategy optimization involves a knowledge of risk return goals, use of backtesting parallel infrastructure, and high quality data to use a timing triggers.

Summary

Matt Amberson of ORATS joined the SafeDay Trading podcast to discuss options trading strategy development. Steps include knowing risk return objectives, testing strategies, identifying possible strategies and applying timing triggers, re-testing strategies, paper trading, and gradually building to a size appropriate for risk return goals. ORATS has developed an optimized backtester to help clients find strategies, with tools to analyze and compare backtest results. Trigger optimization involves testing tens of thousands of indicators and simulating backtests before running a full backtest. ORATS also has an integrated paper trading system to test strategies.

Matt Amberson of ORATS joined Mark Stowers of the SafeDay Trading podcast to discuss options trading strategy development. Here's a link to the podcast or search for it in your podcast provider of choice. 

Finding an options strategy that meet your investment objectives involves the following steps:

  • Knowing your risk return objectives
  • Testing strategies
  • Identifying possible strategies and applying timing triggers
  • Re-testing strategies
  • Paper trading
  • Going live small and gradually building to a size appropriate for your risk return goals.

Understanding your risk return objectives is a critical step and will define the types of options strategy you can do. For example, if you are risk averse you will prefer long or low risk strategies. 

Once you have identified strategies and tickers that meet your objectives, it is time to backtest the parameters of the strategies. ORATS has a backtester with many popular strategies and the ability to combine strategies to structure an infinite number of trading approaches. 

ORATS has developed an optimized backtester to help our clients find strategies. For each strategy, the range of acceptable parameters are determined. For example, if you know you would not trade any call butterfly over 90 days you would limit the days to expiration (DTE) to 90. Once you get a range for DTE, delta, other entry criteria, exit criteria, the optimizer arranges all the possible combinations of parameters into many backtests and runs them in parallel. 

ORATS has tools to help analyze and compare backtest results.

 

When all the tests have completed for a strategy, there is a tool in the optimizer process that gives weights to each return statistic for each backtest. This tool scores and sorts the backtests to help you analyze which strategy is best for your objectives. For example, you may value a high annual return and a low worst year return as in the weighted score above. See how the best annual return of 8.55% is scored less than the one with 6.59% because the worst year of -5.56% is better than -18.95%.

Next take the 6.59% strategy and see if applying timing triggers can produce better results. ORATS has tens of thousands of indicators and the moving average of indicators. Testing these indicators can get computationally expensive, so techniques are used to simulate a backtest. After good looking simulations are found, a full backtest can be run to confirm the results.

After a strategy with triggers is found that works as expected in the trigger simulation and in the backtest, paper trading can be started. ORATS has an integrated paper trading system to test strategies. 

Once paper trading is found to be consistent with backtests, trading small in the market can be started and finally trading a size that is consistent with risk return objectives.

 

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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