Option FanaticOptions, stock, futures, and system trading, backtesting, money management, and much more!

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.

—————————

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.

No comments posted.

Leave a Reply

Your email address will not be published. Required fields are marked *