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Backtesting

Tuesday, March 23rd 2021

Testing The Covered Combo Options Strategy

Backtest the covered combo by selecting a short straddle and add a long stock position.

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Summary

The covered combo options strategy involves shorting an out of the money call and put while going long on the stock. The ORATS backtester can be used to set up the strategy by selecting a short straddle and adding a long stock position. The default covered combo with 30 days to expiration and 30 delta short strangle + long stock has an average annual return of 13.01% and Sharpe of 0.66, outperforming long stock alone. However, it also adds additional risk and volatility, leading to a lower Sharpe.

The covered combo options strategy is short an out of the money call, short an out of the money put, and going long the stock. You can also think of it as a covered call with a short put. Also, it's a short straddle with long stock.

  • To set up the strategy in the ORATS backtester, start by selecting a short straddle from the neutral options strategies offered.
  • From the additional parameters, select Stock Position Edit 
  • Select Type = Married and Ratio = 1

Note that Overlay would carry a stock position for the entire date range whereas Married only carries stock when there is an options trade on.

 

The results of the default covered combo with 30 days to expiration and 30 delta short strangle + long stock is an average annual return of 13.01% and Sharpe of 0.66

By way of comparison, long stock only returned 11.13% and had a Sharpe of 0.74 since 2007.

A short straddle alone had a return of 4.31% in notional terms (stock price as the divisor not margin as the divisor) and a Sharpe of 0.49.

Other combinations of days and deltas were tested as below. 

 

The assessment of the covered combo is that it adds to returns but sacrifices with additional risk and volatility, leading to a lower Sharpe. 

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.
Interactive Brokers is not affiliated with Option Research & Technology Services, LLC and does not endorse or recommend any information or advice provided by Option Research & Technology Services, LLC.