Trading System #3–Naked Puts (Part 2)

In http://www.optionfanatic.com/2012/12/06/trading-system-3-naked-puts-part-1/, I presented some initial results for the naked puts (NP) trading system.  Five years ago when I began to backtest option strategies, my first step was to assess the profitability of a trading system.

The current system aims to sell puts every month.  If I lose over $30K in any one week then I exit the market and stay out until I see two consecutive weeks of market gains.  The profit of 604% results from my selection of $200K as the initial account equity.  I arrived at this figure by setting a stop-loss at a max weekly drawdown of $30K.  I therefore aimed to exit upon losing $30K / $200K = 15% in one week.

In the backtest, the NP system gained 604% over nearly 12 years, which is about 17.6% per annum.  That is a pretty impressive number especially considering that it is a constant contracts trading system.  This means the position size remains constant throughout (60 contracts).  Constant risk in the face of increasing account value means overall exposure decreases.  This will leave room to either increase position size over time or incorporate other trading systems to my portfolio.

These are the sorts of numbers that are often presented in advertisements and infomercials, but unfortunately they literally do not even begin to tell the story.

In this case, the max DD was $234K, which is more than the initial account value.  The position size remains constant throughout, which means this DD could have occurred very early on in the trade.  In that case, the account would have gone bust!

You never hear/see that in an advertisement or infomercial for trading strategies, newsletters, or educational programs.  optionScam.com, anyone ( http://www.optionfanatic.com/2012/04/21/optionscam-com/)?

I will continue this analysis in my next post.