Automated Backtester Research Plan (Appendix A)

I’ve been getting more organized this year by converting incomplete drafts into finished blog posts. I thought I had wrapped up the automated backtester mini-series here, but I was wrong! I have one more draft with research notes on potential future directions. On the off chance someone out there can possibly benefit, from Jan 2019 I present the next two posts.

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With regard to iron condors (split-strike butterflies), maybe we set short strikes at 10-40 delta by increments of 10 and figure out what the wing widths are going to be. Maybe we close an offended vertical if short delta increases by X or if trade gets down 6% when using profit/loss targets of 10%/-15% or so. Maybe we have to calculate max potential profit and look to collect 50-90% of that as early management (or closing at 7-21 DTE by increments of 7).

From the previous post on vertical spreads we could go in a couple different directions. I talked about one specific trading plan called “The Bull.” I would like to backtest a few other particular trades (i.e. Netzero, STT, RC). I could give some particulars about those trades or maybe the backtesting plan just like I did for The Bull.

Finally, and many of these could be posted under “additional considerations” (along with many of my non-automated-backtester backtesting ideas), I have to face the possibility that all of this is done in vein. We’re looking at historical data and possibly setting critical levels that only get breached in 5% of cases. This may make me feel more comfortable when taking action at these points, but it certainly is no guarantee they will be effective in case we are in a longer-term period where distribution on that parameter changes. To that end, it would be nice if I could somehow split the data and do some WFA but I fear the sample size may be too small (see third paragraph here).

This concern even applies to something as general as daily option-price changes. Looking over the whole data span, option prices generally only change by $X/day. When IV picks up and backwardation occurs with huge ATRs, though, those daily price changes are going to be magnified—possibly 5-10X or more. Clearly this indicates a time to step out but what if such volatile activity persists for a periodi of years? This trading approach might be on the sidelines for the duration.

I will conclude next time.