Backtesting Stock Option strategies

MarkMilner · 4 June 2014

Hello,
I am a bit new to options trading and I have a few ideas how to start my trading. I have used some stock screeners to find a good optionable stocks. I am also using these to build vertical credit spread strategies where reward is 10-20% vs risk
and breakeven point is far from existing stock price. I am also considering using simple Long Call options but not sure which strategy is better.

Does any one know a good tool for backtesting option strategies? Ideally not expensive and simple to use.

minwa · 4 June 2014

Screeners will pump some numbers and spit out a list of stocks, some of them will be bad some will be alright only a little will be "good". Don't rely on your screener, it sorts and saves you time that's it, no secret sauce there. Don't let me stop you though, beginners will play around and somehow see the filtered list of stocks as some sort of golden bunch. Play around with it, just remember it when you're fed up that it doesn't feed you the magical winning stocks, you'll grow out of it.

Long call or vertical spread which is better depends on your projection and outcome of price x time horizon x volatility (implied) x rate of change.

Optionvue is probably the best options back test but its most likely out of your price range. If you're trading US markets you have Think or Swim. Aussie market you're pretty much out of luck for an inexpensive choice.

PurePA · 7 July 2014

minwa said:
Screeners will pump some numbers and spit out a list of stocks, some of them will be bad some will be alright only a little will be "good". Don't rely on your screener, it sorts and saves you time that's it, no secret sauce there. Don't let me stop you though, beginners will play around and somehow see the filtered list of stocks as some sort of golden bunch. Play around with it, just remember it when you're fed up that it doesn't feed you the magical winning stocks, you'll grow out of it.

Long call or vertical spread which is better depends on your projection and outcome of price x time horizon x volatility (implied) x rate of change.

Optionvue is probably the best options back test but its most likely out of your price range. If you're trading US markets you have Think or Swim. Aussie market you're pretty much out of luck for an inexpensive choice.

Oh common, stop fooling others, it is obvious that you're very out of touch options trading.

PurePA · 7 July 2014

MarkMilner said:
Hello,
I am a bit new to options trading and I have a few ideas how to start my trading. I have used some stock screeners to find a good optionable stocks. I am also using these to build vertical credit spread strategies where reward is 10-20% vs risk
and breakeven point is far from existing stock price. I am also considering using simple Long Call options but not sure which strategy is better.

Does any one know a good tool for backtesting option strategies? Ideally not expensive and simple to use.

MarkMilner,
forget about Thinkorswim, it is misleading recommendation, the other poster doesn’t seem to know what he’s talking about.

I had accounts with both Thinkorswim (TOS) and later with TD Ameritrade when they bought TOS. These days you’d have to create a company in USA or some other legal entity in order to be able to use it. This has been the case for the last 2 or 3 years, ever since ASIC introduce the new margin requirements, so forget about Thinkorswim.

Since you’re a beginner, you could consider http://www.hoadley.net/options/options.htm it is relatively cheap, and very good for its price. It can model options theoretical values based on the underlying, so in this sense it would give you more flexibility if you won’t have access to historical data. I’ve used it myself but it was about a decade ago.

If you’ll be trading US markets (anything else has problems with liquidity = huge slippage), then currently the best backtesing tool is OptionNet Explorer (better than OptionVue). I’ve used it myself, and I can vouch for it, though remember that you’re just leasing it together with the data and cannot keep it.

ftw129 · 7 July 2014

Oh please don't mention the ThinkOrSwim word... I'm still in mourning

Previous poster is right though. You want to head straight over to the US markets if you're going to be using Options as your main "trading instrument".

Interactive Brokers are dirt cheap but I'd be willing to go back to paying a premium to use the ThinkOrswim platform and their outstanding support and resources.

I'm used to the IB "way" now though, and if I didn't have ThinkOrSwim to compare to then I'd probably think that IB is pretty good. But I do, so it ain't!

Sorry to stop you in your tracks but using long Options is a very hard game to play and I've never met anyone who successfully trades them Long consistantly (profitably) over the long term. The odds are heavily stacked against you.

Don't get me wrong though, many traders make money using Options as their trading vehicle but they use them in much more complex ways, which you're bound to learn about eventually if you stick it out. Only took me about 7 years lol

Good luck!

ftw129 · 7 July 2014

Please disregard my previous post. I just went over the original poster's question and I've completely gone on a tangent because of the mentioning of the ThinkOrSwim word!

It's great that you are doing your research MarkMillner. You're on the right track by the sound of it but I'm sorry I can't offer a good backtesting platform because I used to do that on ThinkOrSwim and I don't need to anymore (nor can I). Although PurePA made some fantastic recommendations.

So yeah, apologies for the rant and please disregard my previous post I can't delete it now. Hopefully I did add some sort of value to the thread though.

>>> insert embarrassed emoticon here<<<

PurePA · 7 July 2014

ftw129 said:
Oh please don't mention the ThinkOrSwim word... I'm still in mourning

So am I . I still do have accounts with other US brokers, but really miss TOS, especially their aggressive margins. For example TOS would only margin one side on uneven spreads. Other brokers (though not all of them) margin both sides on uneven spreads (such as broken wing butterflies) instead of margin just the max loss side.

I do miss TOS’s platform, but one way to get around it is to create spreadsheets and hook it up with DDE with a broker that lets you to do so. By the way, OptionetNet Explorer is not only a top notch backtester but also a very good analysis software that I personally prefer over TOS's analyser. Optionet explorer can stream live data from TOS and Trademonter (I have used the above combos) and apparently also to though IB though I haven’t used that combo myself but have heard from other traders that there were that they had some issues with the live IB data combo in the past.

Either way IB is in a process of updating their margin licence (thanks to big brother ASIC), and Trademonster margins both sides and doesn’t have DDE (unless there have been some updates recently). So it seems like establishing company is US is the way for serious option traders because otherwise non US residents will be at the whims of any potential new regulations either from ASIC or US regulatory bodies.

Have you tried options on KOSPI or DAX? I haven’t, and would like to hear from those who have.

ftw129 · 7 July 2014

PurePA said:
So am I . I still do have accounts with other US brokers, but really miss TOS, especially their aggressive margins. For example TOS would only margin one side on uneven spreads. Other brokers (though not all of them) margin both sides on uneven spreads (such as broken wing butterflies) instead of margin just the max loss side.

I do miss TOS’s platform, but one way to get around it is to create spreadsheets and hook it up with DDE with a broker that lets you to do so. By the way, OptionetNet Explorer is not only a top notch backtester but also a very good analysis software that I personally prefer over TOS's analyser. Optionet explorer can stream live data from TOS and Trademonter (I have used the above combos) and apparently also to though IB though I haven’t used that combo myself but have heard from other traders that there were that they had some issues with the live IB data combo in the past.

Either way IB is in a process of updating their margin licence (thanks to big brother ASIC), and Trademonster margins both sides and doesn’t have DDE (unless there have been some updates recently). So it seems like establishing company is US is the way for serious option traders because otherwise non US residents will be at the whims of any potential new regulations either from ASIC or US regulatory bodies.

Have you tried options on KOSPI or DAX? I haven’t, and would like to hear from those who have.

Hey thanks for that PurePA. Some valuable stuff there!

minwa · 8 July 2014

PurePA said:
So am I . I still do have accounts with other US brokers, but really miss TOS, especially their aggressive margins. For example TOS would only margin one side on uneven spreads. Other brokers (though not all of them) margin both sides on uneven spreads (such as broken wing butterflies) instead of margin just the max loss side.

I do miss TOS’s platform, but one way to get around it is to create spreadsheets and hook it up with DDE with a broker that lets you to do so. By the way, OptionetNet Explorer is not only a top notch backtester but also a very good analysis software that I personally prefer over TOS's analyser. Optionet explorer can stream live data from TOS and Trademonter (I have used the above combos) and apparently also to though IB though I haven’t used that combo myself but have heard from other traders that there were that they had some issues with the live IB data combo in the past.

Either way IB is in a process of updating their margin licence (thanks to big brother ASIC), and Trademonster margins both sides and doesn’t have DDE (unless there have been some updates recently). So it seems like establishing company is US is the way for serious option traders because otherwise non US residents will be at the whims of any potential new regulations either from ASIC or US regulatory bodies.

Have you tried options on KOSPI or DAX? I haven’t, and would like to hear from those who have.

You are obviously at the very early level of the "professional traders development" level. Do try investopedia.com, you might find some hidden insights there.

hhse · 5 August 2014

I am also using these to build vertical credit spread strategies where reward is 10-20% vs risk

Assuming options & underlying are liquid, then probability should already be priced in.

Amount paid divided by width of strikes for vertical is your probability of success for long verticals; and
(Vertical width less Amount paid) divided by width of strike is your probability of success for short verticals.

This would make back testing less relevant.

Backtesting Stock Option strategies

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