Which Option Strike Price Should I Select? [AAPL Call Bull Spread Backtest]

In this show I reveal the results from our call debit spread backtest we ran on AAPL and how changing the strike prices impacted the overall returns and drawdowns of this bullish strategy. If you've ever thought of buying options, you need to listen to this show.
Which Option Strike Price Should I Select? [AAPL Call Bull Spread Backtest]
Kirk Du Plessis
May 29, 2017

Apple (AAPL) is by far one of the most loved and favorite stocks to trade for investors. Often times people will email me asking how they can use option buying strategies to go long AAPL stock. So in today's show I wanted to reveal the results from a recent backtest we ran on AAPL and show how the results differ based on strike price.

APPL Call Debit Spread Backtest Variation

Variation 1:

  • For the first variation, did 30 days until expiration on a daily frequency.
  • No IV rank, 20% allocation of the portfolio and took profits at 25%.
  • No stop-loss and did the long strike Delta at 0.4, slightly out of the money.
  • Picked a $5-wide spread.

Results:

  • Returned 107% with a 9% annual CAGR, and a Sharpe ratio of 0.16.
  • Although this time the strategy won, it could potentially be a big loser in 6 months.
  • There is no real risk-defined or risk-adjusted advantage with such a low Sharpe ratio.
  • The biggest drawdown was 84%, and second biggest was 82%.
  • The longest time to recover from the drawdown was almost 1,200 days.

Variation 2:

  • Bought long strike options of 0.5 Delta, paying more money per spread.

Results:

  • Total return was 194% and an annual compound growth rate of 10.32%.
  • The Sharpe ratio was lower, because the portfolio went through a lot more volatility.
  • The win rates were 72% when profits were taken earlier and options were bought at the money.
  • When options were bought out of the money and profits taken earlier, win rate was 69%.
  • At the money, the max drawdown was 79% versus 84% out of the money.
  • Drawdown days remained similar at 1,200 days.

Conclusion & Take Aways:

  • Comparing these two strategies shows that you pay for what you get with debit spreads.
  • Debits spreads contain a lot of volatility, with both really good times and really bad times.
  • It is important that your sequence of returns is in order, that there are no big drawdowns early in the cycle.
  • Both strategies won really big, really early on with massive gains in the equity curve early in the cycle.
  • These strategies were saved from being total disasters by being "lucky" and winning early on.

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