One great aspect of established financial markets is that extensive historical data is available for backtesting trading strategies.
Additionally, traders can deploy "mock" trades (simulated) and observe how they perform over time, without risking capital.
Leveraging these activities, as well as the knowledge acquired from them, can help traders deploy optimized portfolios. From this perspective, a recent episode of Market Measures is "must-see TV" for every options trader in the tastytrade community.
This particular episode examines the historical performance of three different strategies across a variety of market environments. The findings presented on the show can, therefore, help traders better understand how a particular approach performs under a variety of conditions.
Studying the findings from this show, alongside your own mock trades going forward, may unlock new ideas for your portfolio.
Specifically, this Market Measures looks at three strategies, including:
long ITM put
short OTM call
short OTM put
Next, the team backtested each of the above strategies across three market environments - down markets, up markets, and all markets, to see how each strategy performed.
The study incorporated the following parameters:
Time period: 2005-2016
Trade Duration: 45 DTE
All trades held to expiration
Due to the complexity of the findings, we recommend watching the entire episode of Market Measures because every trader may interpret the results differently according to their own approach. However, some of the high-level takeaways are as follows.
In down markets, the long ITM put strategy performed the best, while the short OTM call also showed impressive results. In up markets, the short OTM put strategy performed the best, followed by the short OTM call approach.
As you can see, in both market environments (up or down), the short OTM call strategy had a win rate above 50%.
Now let's consider the results of each strategy across all market environments, as shown below:
The slide above indicates that the short put strategy had the highest win rate (85%) across all market environments. However, we see once again that the short call strategy also achieved an attractive success rate (71%).
If nothing else, the data and findings in this study can help traders better risk-manage their portfolios, as well as optimize the deployment of future trades to help ensure that trade structure matches a trader's outlook.
For example, if you are expecting the market to continue to grind higher, and you own long ITM puts, it might be worth reevaluating whether that position fits the portfolio.
Likewise, given the success rate of the short OTM call strategy in each of the three studies, there’s an argument to be made that this structure makes sense with the market at (or near) all-time highs.
No matter your specific approach, the data presented on this episode of Market Measures should prove valuable for traders looking to optimize their approach - or simply those looking for new trading ideas.
If you have any outstanding questions related to the material presented in this episode we hope you'll reach out directly at firstname.lastname@example.org.
Thanks for reading!
Sage Anderson has an extensive background trading equity derivatives and managing volatility-based portfolios. He has traded hundreds of thousands of contracts across the spectrum of industries in the single-stock universe.