For those users who know their way
around Excel pretty well, i.e. intermediate to advanced Excel users, we think
that will be the case with the new Option Wizard® Simplified Options Strategy
(SOS) Backtester.
Yet documentation is something we
all need from time to time, to fill in gaps., to clarify, etc.Things that are obvious to the developer –
not so to the client.
So it is with Option Wizard®
Simplified Options Strategy (SOS) Backtester.
So here are some instructional
notes to assist you.
Let’s get started.
Make a copy
Before doing anything, please save
a pristine copy of your software.Call
it OWSOSBMaster.xls, or other name you prefer.If you overwrite a cell, or otherwise violate your working copy, you’ll
have this one to start fresh from.
Sample
variance:a quick probability study
The basic question that Option
Wizard® Simplified Options Strategy (SOS) Backtester seeks to answer:probability of exceeding a certain target
price above (and below) its last price.That is, if
SPY is 135, what is the
probability it will move above 140 or below 130 in the next 35-day period?
Or move one standard deviation?
Or two.Or two and one-half.Etc.
What good it this?
Those who trade delta neutral
strategies need to know where to place their shorts, and longs.Delta neutral strategies include condors,
butterflies, calendars and diagonals.
Those who trade directionally need
to be informed on this point as well.
But these insights have been
laborious to achieve. Options strategy backtesting has been a laborious process
for many in times past, taking hours to test one strategy on one
underlying.Others have taken a shortcut
using delta as shorthand for probability.
But using delta is an
estimate.Question still remains, what
happens in the real market?How does
this change over time?
Option Wizard® Simplified Options
Strategy (SOS) Backtester can provide insights.
Using sample variance, i.e.
measuring how often past market data exceeds certain price bands, speeds the
process to one or two clicks.We use (the
still) prodigious power of Microsoft Excel.
Let’s begin.
UPPER
BAND
138
130
LOWER
BAND
1.So,
step one, set your target bands, L6 and L7, against your underlying.Here we are tracking the
SPY,
last 135.So we go 3 points up and 3
points down.
2.Next,
step two, hit the refresh button at A10 to get the latest prices.
Then see the results:
DAYS TO EXPIRATION OR EXIT (period under test)
VARIANCE TO EXPIRATION OR EXIT "X' DAYS BACK
"+ VARIANCE BORDER
"- VARIANCE BORDER
42.38
0.00
0.030
(0.030)
"Extremes" hit, ie >< VARs
513
331
Days in sample
1226
1226
1226
% time move > or < VAR's
Fri-7-Jul-06
41.86%
27.01%
Summed
Wed-6-Jul-11
68.86%
Custom
days
600
346
98
in
sample
Wed-18-Feb-09
57.67%
16.33%
Wed-6-Jul-11
74.00%
In this case, in the past 5 years,
SPY
moved up 3% or more against the price 42 days earlier, 41.86% of the time.Down 3% or more, 27.01% of the time.
But let’s say you don’t want a
five-year look, too long, you say, times change.You just want, say, the last 600 days.OK, Option Wizard® Simplified Options
Strategy (SOS) Backtester shows you there has been more move to the upside,
57.67% vs. 41.86%.Less to the downside,
16.33% vs. 27.01%.
Who uses arbitrary price level
targets?Technical analysts who chart
support and resistance, moving averages, and momentum oscillators.
Others prefer a more statistical
approach, however, and we aim to please them as well:
Standard deviation
3.Take a more statistical approach, if you like, by using
standard deviation (SD) instead of arbitrary price levels.Option Wizard® Simplified Options Strategy
(SOS) Backtester provides the following SD table (again, using SPY), columns T
to X in the program:.
Students of statistics know that a one standard deviation
move occurs 68.3% within a distribution, two SDs 95.4% of the time, and three
SDs, 99.7% of the time.Translating, if
you are short an option that lies outside the one SD band, you have about a 2
out of 3 chance, statistically, of collecting all the premium.2 SDs, better than 20 to 1, and 3 SDs, better
than 100 to 1.
But watch out when playing Russian roulette, no matter how
many chambers you’re spinning.The gun
is loaded, and the bullets are live.But
I digress….
STANDARD DEVIATIONS
68.3%
95.4%
99.7%
Historical volatility
0.1428
"+1 SD
"+2 SD
"+3 SD
Daily
19
1.00
2.00
3.00
Weekly
7
2.65
5.31
7.96
Monthly
3
5.52
11.05
16.57
Custom
2.70185122
7.08
14.17
21.25
Daily 1 SD
High
134.97
135.97
136.97
Low
132.97
131.97
130.97
Weekly 1 SD
High
136.62
139.28
141.93
Low
131.32
128.66
126.01
Monthly 1 SD
High
139.49
145.02
150.54
Low
128.45
122.92
117.40
Option Wizard® Simplified Options
Strategy (SOS) Backtester automatically calculates the historical volatility
for your underlying:here, for 42 day
time period, 14.28% for
SPY.(Historical volatility has its own worksheet
in the program.)
Want a “custom” period?In the box shown here as “2.70185122”, the SD for 50 days, derived from
the formula, =SQRT(365/50), just replace “50” with how many days you wish to
see SD for.Option Wizard® Simplified
Options Strategy (SOS) Backtester returns the 1, 2 and 3 standard deviation
moves during the period you choose.
Special note:if you
want to set upper and lower band prices to 1 SD or 2 SD or 3 SD, simply link to
appropriate cells in standard deviation table.
Technical analysis
Back to TA.Some options mentors put zero stock in
technical analysis.“You can’t know the
direction of the market,” they say.“Gubanacci, Fibanacci, who cares!”
There is some truth in that, but
like everything else, it’s a bit more complicated.
What if you’re vastly overbought at
the time you plan to put on your trade?
What if you’re vastly oversold?
Will the
SPY
perform exactly the same in all market conditions?Is it as likely to move “sideways” if it has
been bulled to the moon, or thrown under the bus?
In a word, no.
Option Wizard® Simplified Options
Strategy (SOS) Backtester provides an overbought/oversold filter for you,
stochastics %D (column AG;column AF is
%K, for those of you who know your technical analysis).
We now pose the same question, how
often does
SPY move > 3% or <3% in the
42 day period ---- but this time – WHEN %D is > 80 (overbought), or %D is
< 20 (oversold)?
Big difference.
ADDING TECHNICAL ANALYSIS
FILTER:DAYS EXCEEDING VARIANCE TO
UPSIDE WHEN %D>80
ADDING TECHNICAL ANALYSIS
FILTER:DAYS EXCEEDING VARIANCE TO
DOWNSIDE WHEN %D<20
The so-called timing of the "pregnant
elephant" in the 100-yard dash after running the 440.
225
105
1226
1268
18.36%
8.28%
26.64%
147
39
24.50%
6.50%
31.00%
To the upside in an OVERBOUGHT
CONDITION:just 18.36% vs 41.86%.
To the downside in an OVERSOLD CONDITION:8.28% (when oversold) vs 27.01% (when not).
You know this intuitively, to a
degree, but knowing this statistically, with hard numbers, gives you a bit of
“edge.”We all need edge – all that we
can get.
Simply put, don’t be overly eager
to buy into overbought, and sell into oversold.As a practical matter, some successful condor traders, e.g. are selling
the call credit spread side of the IC when overbought, waiting, patiently, then
selling the put credit spread, after a decline.
As such, Option Wizard® Simplified
Options Strategy (SOS) Backtester, provides you with a trusty “second
opinion.”That, alone, can pay for it
many times over.
Pose the same question for 600
days, versus entire five years
24.50% UPMOVES IN AN OVERBOUGHT
MARKET vs 57.67% in “normal” market.
6.5% vs 16.33% DOWNMOVES IN AN OVERSOLD
MARKET.
Most settings in Option Wizard®
Simplified Options Strategy (SOS) Backtester are customizable.You can find them in
boldface red.
Brief as possible, that’s our
story.Send your questions to me at jas
at option-wizard.com.As always, we wish
you success.
Special
situations: less than 5 years data
Stocks with less than five
years of daily data may or may not be good candidates for this kind of
statistical analysis. If you wish to pursue it, however, you will
need to manually reset some links in the program. For newer stocks,
with < 5 years data, reset links in A15:B20 to last row of data.
Similarly, reset links in tab "Historical volatility" and then,
standard deviation table (change last from H1268 to your new last row of
data) on the page "Option Wizard® Simplified Options Strategy (SOS)
Backtester" as well.
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& Associates, Inc. -- 100758