TOS Thinkorswim Thinkback and Backtesting

[tjlocke99]

Hello. I have a few questions/comments about backtesting in TOS.

1. If you select that you entered a trade in TOS using the thinkback tool, is the price you enter supposed to be based on the opening price for legs in the options spread for that day?

2. When you close the trade does thinkback assume you are getting the mid of closing price for the legs in the options spread that date?

3. Is it the closing price for the underlying that day?

I always assumed it was based on closing prices, but I just wanted to check.

Also, I see this as a major issue with backtesting in TOS, you can only base it on whatever open/close condition it uses.

Thank you!

Richard

[Kim]

TOS always gives closing prices. It is an issue, because prices fluctuate during the day. However, it still gives you a general idea about potential P/L.

[cwerdna]

You can use OnDemand (orange button in the upper right) in order to do intraday backtesting.

[tjlocke99]

You can use OnDemand (orange button in the upper right) in order to do intraday backtesting.

Thank you. I do not see an orange button? Is it in the Analyze -> thinkback section?

[cwerdna]

Thank you. I do not see an orange button? Is it in the Analyze -> thinkback section?

No, it's not. It's in the upper right of the screen, above the Setup button. it's the same vertical position as the Monitor, Trade, Analyze, etc. tabs.

[Guest listolyman]

Thank you. I do not see an orange button? Is it in the Analyze -> thinkback section?

I do not see the OnDemand in my paper account but it is visible in the non-paper account.

[Thaze]

I'm still trying to get a better understanding of backtesting through TOS, so my question is pretty simple. Are you just taking the average IV of each stock "x" number of days out for each trade and taking the average moves of each weekly to get an estimated IV move prediction?

Example:

ANF

5/10/2012 IV = 92.19

5/15/2012 IV = 147.94

Difference = 55.75

55.75 / 5 = 11.15% IV move per day on average (for this cycle).

Then just rinse and repeat for previous cycles to get an average of the averages (hope that makes sense)?

Edited August 9, 2012 by Thaze

[Kim]

No, I'm looking more on the prices and less on IV values.

[Thaze]

Can you explain a bit more? I know you look at the implied move vs historical move, but how do you decide if there is room for IV increase above the current prices to justify the purchases of plays? The IV is constantly changing each cycle, so how do you come to the conclusion that each play has upside potential?

Edited August 9, 2012 by Thaze

[Marco]

well I finally got a TOS paper account myself (was on my to do list for months now) and so far back testing (at least not that way) wasn't a big part of my strategy.

Well I thought I give it a try and see whether it gives me any new insights. I looked at less than 5 names so far but I decided to go 4-5 quarters back and look at the implied move 1 week (5 trading days) ahead of results and the implied move on the last day. I ignore price changes from move in the stock price. So if a stock was at 19 a week ahead of results I take the price of the 19 ST divided by 19 and if it moves to 20 ahead of the earnings I compare that no vs. the price of the 20 ST divided by 20 on the last day. I do that over 4-5 quarters and if a stock regularly shows an increase in implied move over the week ahead of earnings that makes it a stronger candidate. Also you can see if the implied move is usually ~5-6% that if its 8% this cycle it might be a bit expensive (unless the last quarter had a massive move).

Thats my take on back testing but as I said I only did 4 names so far and haven't trade one of them yet. So keen to hear what exactly Kim and Chris actually do when they 'back test'.

thx.

m.

[Thaze]

Thanks for the response Marco, I'll start doing the same for my future plays to help get a better idea. I would still love to hear back from Kim or Chris on how they go about the process. I know its quite a bit to ask, but I'm sure the community as a whole would greatly appreciate a more detailed description or guide as to how they undergo the backtesting process. Thanks in advance.

[Marco]

well I finally got a TOS paper account myself (was on my to do list for months now) and so far back testing (at least not that way) wasn't a big part of my strategy.

Well I thought I give it a try and see whether it gives me any new insights. I looked at less than 5 names so far but I decided to go 4-5 quarters back and look at the implied move 1 week (5 trading days) ahead of results and the implied move on the last day. I ignore price changes from move in the stock price. So if a stock was at 19 a week ahead of results I take the price of the 19 ST divided by 19 and if it moves to 20 ahead of the earnings I compare that no vs. the price of the 20 ST divided by 20 on the last day. I do that over 4-5 quarters and if a stock regularly shows an increase in implied move over the week ahead of earnings that makes it a stronger candidate. Also you can see if the implied move is usually ~5-6% that if its 8% this cycle it might be a bit expensive (unless the last quarter had a massive move).

Thats my take on back testing but as I said I only did 4 names so far and haven't trade one of them yet. So keen to hear what exactly Kim and Chris actually do when they 'back test'.

thx.

m.

I suppose another way of looking at it would be to just see whether the ATM ST entered x days before earnings would have made you money. In the end we don't care whether we make money from IV increase or a stock move. If a stock 'tends to move before earnings' and made money 8 out of 10 times despite a dropping implied move it should still be a good candidate. Still keen to learn what approach the 'back testers' here take.

Anyway the longer I look at finding the good names the more I think it's more about avoiding the big losers (which isn't much easier either) then finding a criteria for 'good names'. I regularly see names that I consider rich making a good return. So for me it has become more about excluding names for reasons like spreads and liquidity and names that seem quite high risk (when they are priced well over their historical move) and play all the rest. The more names I play the more I diversify the risk of my earnings trades portfolio and it allows me to have a decent IC position....

[Thaze]

I agree, a move is a move, whether it be IV or underlying. Both are profitable if they follow trend so both should be taken into consideration. In relation to your second paragraph, I also need to take this into consideration.

One of my major questions I have though in relation to backtesting is how Kim / Chris / others come to an "acceptable" IV range and price for each play. For example, in the CSCO trade earlier yesterday Kim made the comment "The August 17 straddle trading around 1.12 implying 6.5% move, with IV around 49%. Seems pretty cheap. Backtesting showing good results. I will be looking to enter in the next 1-2 days, will be definitely in if the price dips below 1.10.". How did he decide that an IV of 49% is acceptable and that there is potentially room for increase? I understand you can look and see if there is a trend of increasing volatility on the weeklies, but how can you verify the current cycle IV has room to increase? The volatility of the underlying stock often drastically varies between each cycle so it's not like you can just take an average low/high IV to expect. This is my major issue, as if I could understand how to predict an IV range to expect, I would be able to better understand what I'm willing to pay for the trade.

Also, how did he come to the conclusion that 1.10 was a good price? I understand you can compare the implied move to the historical move and since this was lower than historical that it had a good probabilty to gain value, but I feel as if there is something else that I may be overlooking here. Why not enter at 1.09 or 1.11? I know this may seem like a stupid question, but it can cause big differences in potential future gains. Just curious as to how they come to this "chosen" number. If for example the IV is much lower than normal, how do you decide how much more you will be willing to pay for the higher odds of a larger IV gain based on the historical values? I may be overcomplicating the entire process, but I'm just really curious as to how they take all these factors into consideration when reaching a price goal.

Edited August 10, 2012 by Thaze

[Kim]

Marco, the process you described is pretty much what I do. I don't rely on the stock move, but if the stock shows consistent pattern of decent move before earnings, it would definitely help to define it as a strong candidate.

thaze, I'm looking at historical patterns. For example, for CSCO, 1.10 represents about 6.5% implied move. Historically, when bought at those levels, the straddle had very good chance to be profitable. It was very rare that the straddle went below 6%, so you have pretty good floor around 1.02. So I defined 1.10 as a good entry point and place a limit order there. After not being filled fo couple of hours, I raised it to 1.11 and was filled.

For a stock like CSCO it is easy because 1) they usually report on Wednesday and have weeklies so the time to expiration is very similar from cycle to cycle 2) the stock price did not fluctuate too much in the recent few years - most of the time it was in 18-20 range give or take. For other stocks it might be more difficult because there are more moving parts.

[Marco]

Marco, the process you described is pretty much what I do. I don't rely on the stock move, but if the stock shows consistent pattern of decent move before earnings, it would definitely help to define it as a strong candidate.

thaze, I'm looking at historical patterns. For example, for CSCO, 1.10 represents about 6.5% implied move. Historically, when bought at those levels, the straddle had very good chance to be profitable. It was very rare that the straddle went below 6%, so you have pretty good floor around 1.02. So I defined 1.10 as a good entry point and place a limit order there. After not being filled fo couple of hours, I raised it to 1.11 and was filled.

For a stock like CSCO it is easy because 1) they usually report on Wednesday and have weeklies so the time to expiration is very similar from cycle to cycle 2) the stock price did not fluctuate too much in the recent few years - most of the time it was in 18-20 range give or take. For other stocks it might be more difficult because there are more moving parts.

well makes sense to me, was just wondering whether you do anything different.

thanks Kim

[Thaze]

Thanks for the response Kim, I hate to keep asking questions as I feel like I'm overcomplicating things and just bothering you. I understand how you compare the current IM to historical move and can use that to judge if the price is reasonable and has a high chance of profitability, but I still don't understand how you decide if there is potential for an IV increase of each option. Considering the IV of these stocks change on a quarter to quarter basis, how do you define an acceptable IV range and decide if there is upside IV room? CSCO was a little more predictable than others since it has hovered in the same price range recently (so we can assume the IV will be somewhat similar to previous trades), but a lot of the stocks we play have historically moved quite a bit more. If I could figure out how to find an acceptable IV range to predict then I could use that range to compare against the required theta/vega ratio to see if the gain required is feasible.

Edited August 11, 2012 by Thaze

[Guest]

Have a Look at

https://www.optionslam.com/earnings/volatility/CSCO

you can have listend the historical implMoves and the corresponding occured real Move during earnings

Edited January 25, 2016 by Springy

[Guest]

You should switch to implied move monthly at Optionslam-site.