How do you construct a $100k portfolio, using just ETFs and futures? Find out in the new Top Dogs series.
tastytrade logo
The Skinny On Options Data ScienceBacktesting Active vs. Passive | Aug 18, 2016
Up Next
    The Skinny On Options Data ScienceBacktesting Active vs. PassiveAug 18, 2016

    Conventional wisdom says that passive investing beats active investing. We strongly disagree. We believe you should take control of your investing. Data Science uses visualization tools to make complex concepts and data more easily understood. The head of our research team, Michael Rechenthin has a Ph.D. in Data Science joins the guys to backtest and compare the passive approach to three different active approaches using options. Which do you think will be better? Which strategy has the most risk?

    The passive approach was long the S&P 500 and reinvesting the dividends. That’s exactly what an index mutual fund does and what the so-called experts claim is the best approach. We also studied three different simple active approaches. Two approaches were based upon a Covered Call strategy. One strategy sold the at-the-money (ATM) Calls in the SPX and the other sold the Calls with a 30 Delta. The third active approach was shorting Puts using the ATM Strike in the SPX.

    Our study of the SPX used data from 2000 to the present. A results table included the average yearly return, median yearly return, Standard Deviation of yearly returns and percentage of weeks profitable. The passive approach was consistently at the bottom. The returns generated were lower than two of the active approaches while also having a higher Standard Deviation (SD) of the yearly returns (demonstrating greater risk) than those two active approaches. The passive approach also saw the largest drawdowns. An important observation was made that Implied Volatility (IV) was greater than realized volatility on 82% of the days on the study. A graph of the yearly maximum drawdowns showed that being long the S&P 500 had the worst drawdowns, while the Covered ATM Call and the short ATM Put strategies "had the best bang for your buck, with a third less volatility of returns." This proves that an option strategy is actually safer than long outright positions.

    Watch this segment of The Skinny On Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data aka Mike Rechenthin Ph.D., for the valuable takeaways and the results of Mike’s backtesting the passive approach to three different active (but simple) approaches using options.

    More like this

    tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

    tastytrade is a trademark/servicemark owned by tastytrade.

    tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

    tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

    Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

    © copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.