SteadyOptions is an options trading forum where you can find solutions from top options traders. TRY IT FREE!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Using ORATS Wheel To Test Entries and Exits


My favorite option strategy backtester is ORATS Wheel, which includes a free trial for those interested. In the Steady Momentum PutWrite Strategy (SMPW), we sell out of the money puts on global equity indexes and ETF’s while holding our collateral in short and intermediate term fixed income ETF’s.

There are many potential ways to manage a short put trade, so in this article I’ll share some backtested research to look at the differences between a few methodologies.

 

In SMPW, we benchmark our performance against an ETF that attempts to replicate a popular index, CBOE S&P 500 PutWrite Index (PUT). PUT uses a simple approach of selling front month S&P 500 puts and holding them until expiration. 33 years of historical data is available on CBOE’s website to see the results of this straightforward approach. I like to think of PUT as a broad measure of the “beta” of put writing, similar to an index like the Russell 2000 for US Small Cap stocks.

 

We’ll test this methodology on 7 different underlying assets from 2007-2019 (the data period available in ORATS Wheel). We’ll also test entering at 45 days until expiration (DTE) with an exit at 21 DTE. Lastly, we’ll test a 30 DTE entry with exits occurring when 75% of the credit received has been earned or 5 DTE, whichever occurs first. We’ll look at both excess annualized returns, net of estimated transaction costs, as well as risk adjusted returns with the Sharpe Ratio. Sharpe Ratio is a popular risk adjusted return measurement that is calculated as annualized excess return divided by annualized volatility.

 

Results

image.png

 

Interpreting The Data

There are many ways to interpret what this data is telling us. I prefer to increase the sample size when reviewing parameter choices by averaging results across multiple underlying assets. In this case, 7 symbols were tested over a period of 13 years, with entries assumed to occur every 7 days, creating a sample size of more than 4,500 total trades.  A large sample size helps minimize the impact of any outlier trades that may have occurred during the sample period that might otherwise skew results in a way that could lead to false conclusions.

 

Overall, it doesn’t look like there was a significant difference in results based on the trade parameters over this time period. This is good, as we prefer to see broad parameter stability. The 45 DTE to 21 DTE method produced average results that were slightly worse than the other 2 methods, which is interesting considering this approach is recommended by a popular options trading educator and brokerage firm.

 

In SMPW, we enter our short puts around 30 DTE and look to exit when we’ve made 75% or more of the credit received or about 5 DTE, whichever occurs first. With lower priced ETF’s that represent International equities we typically wait to exit winning trades until they are worth a nickel or less, as certain brokers allow you to exit these positions commission free. The logic, which is generally supported by the data in the chart, is that rolling winning trades ahead of expiration when we’ve made most of the potential profit maymodestly increase returns over the long term since we expect the equity premium to persist. Exiting losing trades a few days before expiration slightly reduces the risk of large losses due to the negative gamma of a short option that increases as expiration approaches.  

 

Conclusion: The Power of Diversification

My final point is meant to highlight the power of diversification.  Looking specifically at the 30 DTE to 5 DTE results, we see an average Sharpe Ratio of 0.59.  I had the ORATS Wheel combine together all 7 symbols into an equal weighted portfolio, and the result was a Sharpe Ratio of 0.76...a 29% relative increase.  Diversification is a generally accepted way to either A. increase returns for the same risk or B. maintain the same return with lower risk. Diversification can be achieved in many ways, and it’s one of the most compelling opportunities for “craftsmanship alpha” in the portfolio construction process that is used in our SMPW strategy.

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.


Related articles:

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Try It Free

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Traditional or Roth Retirement Account?

    When US investors save for retirement, there are many important decisions that have to be made including which investments to use as well as which type of accounts to fund. Tax favored retirement accounts such as 401(k)’s and IRA’s should be utilized to the maximum extent possible because of the opportunity for tax advantaged growth.

    By Jesse,

    • 0 comments
    • 227 views
  • My Favorite Investing Books, Blogs, Papers, and Podcasts

    There are so many excellent sources of investment education available today that I thought a short post about some of my personal favorites could be beneficial. Below are different forms of content that have been particularly impactful to my investment philosophy, and they are not in any specific order.

    By Jesse,

    • 0 comments
    • 469 views
  • Go For Gold! The Business Behind The Dazzle

    The price of gold is often in the news—sometimes it's rising, and other times it's dropping but for the most part, it has been on a steady increase for many years. It is certainly worth more now than it did twenty years ago. When its price is on the rise, we may have thought about the benefits of selling our gold for profit and making some passive income from it.

    By Kim,

    • 0 comments
    • 269 views
  • Using Bullish Calendar Spreads to Profit on MSFT Stock

    A calendar spread is an income trade where the trader sells a near term option and buys a longer-dated option with the same strike price. Usually this is done with monthly options, but it can also be done with weeklies. They are long volatility trades so can be a nice addition to a portfolio as a way to offset some short vega.

    By GavinMcMaster,

    • 0 comments
    • 528 views
  • 3 Principles to a Successful Investment Experience

    Although not an exhaustive list, what I’ll present in this article are three core principles that overwhelmingly stack the odds of a successful long-term investment experience in your favor. These three principles are asset allocation, diversification, and rebalancing.

    By Jesse,

    • 0 comments
    • 389 views
  • Important Tips For First Time Currency Traders

    Diversifying your portfolio is important for all investors, and currency investments are a great way to do that. However, there are a lot of misconceptions and common mistakes that first time currency investors make, and this leads to big losses.

    By Kim,

    • 0 comments
    • 407 views
  • Iron Condors or Short Strangles?

    In my early option trading days, I favored selling iron condors over selling strangles. I thought that selling a strangle was too risky because the potential loss was “undefined”. I thought this made sense because this is what I’d hear from other people that were more experienced than I was.

    By Jesse,

    • 0 comments
    • 1,889 views
  • How To Be A Successful Day Trader From Home

    The good news is that if trading is your passion, then it’s possible to become a successful day trader and work from home. However, it’s not as easy as setting up shop and jumping online. There are specific steps and processes you need to have in place if you’re going to be able to make a living for yourself and have a bright career and future.

    By Kim,

    • 0 comments
    • 536 views
  • 3 Key Pieces Of Advice For New Traders

    These days, everyone claims to be an ‘expert’ on absolutely everything. Apparently, it only takes having a Twitter account to be a seasoned expert on any given subject; all in all, the Internet is full of nonsense. It’s becoming harder and harder to find legitimate answers amongst the quagmire of false information online.

    By Kim,

    • 0 comments
    • 551 views
  • Why New Traders Fail

    Our first advice to new traders is: "Learn First, Trade Later". The markets will always be there, but if you start trading without proper fundamentals, your capital will be gone very fast. The barrier to enter trading is so low today, commissions are near zero, and the whole trading game looks very promising.

    By Kim,

    • 0 comments
    • 750 views

  Report Article

We want to hear from you!


There are no comments to display.



Your content will need to be approved by a moderator

Guest
You are commenting as a guest. If you have an account, please sign in.
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs Expertido