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

Call Me Crazy (Part 1)

In these two posts, I started to introduce components I am considering for a new portfolio investment approach. In this post, I will present a long call backtesting approach.

In my opinion, the long call risk graph has one very attractive potential feature: built-in insurance. I included the risk graph in Part 1 (linked above). Notice the horizontal line that extends leftward to zero. That represents a range of prices for the underlying where PnL at expiration does not change. Although I won’t discuss it any further here, this feature makes the long call a prime candidate for “cash replacement.”

When position sized properly, the long call acts like insurance because the premium I pay up front is the most I can lose until expiration. What I need to thoroughly understand is annual cost as a percentage of the underlying. The cost drags down total return, which is bad. The good thing is that I should feel completely safe in case the market goes down. Good, good, good—this is my main reason for being here today.

To gain more understanding of long calls, I conducted a backtest as follows:

Data columns included:

Initial metrics to compute included:

I will present results next time.

No comments posted.

Leave a Reply

Your email address will not be published.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