Portfolio Drawdown Stats from 44,801 Backtested Option Strategies

Use historical data to better understand inevitable portfolio drawdowns. In this show, you'll see a small glimpse of the power behind backtesting and modeling thousands of option strategies. It was by far one of the most anticipated shows for me to record and I hope you find incredible value in listening.
Portfolio Drawdown Stats from 44,801 Backtested Option Strategies
Kirk Du Plessis
Dec 20, 2016

I've been trading publicly on Option Alpha for more than eight years now, and I'm still baffled by the number of investors who get absolutely shocked when option trading portfolio drawdowns occur. I'm talking ALL CAPS emails, mind blown, ripping their hair out shocked that a trading system wasn't a 100% probability of success. And while losing money is by no means "fun" or "exciting," it is, however, part of high probability trading systems.

In fact, you are guaranteed at some point to have a drawdown or streak of losing trades. It shouldn't come as a surprise, and it's why we are so big on balancing portfolios and trading small positions to minimize the impact on your account. Even though we know we'll have portfolio drawdowns from time to time, we also know that we'll end up generating above average returns if we stick with it long enough.

The concept of trading in a positive expected outcome system and being persistent through drawdowns isn't based on my opinion or assumptions, it's backed by math and the 44,801 backtested option strategies I'm going to cover in today's show.

Key Points from Today's Show:

  • Backtesting was done on 10 major ticker symbol ETFs: SPY, FXE, EFA, FXI, USO, GLD, EWW, TLT, IWM, and QQQ.
  • Took the baseline from the test as all short strangles, pure premium selling.
  • Sold 10 days out as a weekly contract all the way to 80 or 90 days out.
  • Tested varying iterations of deltas, stop losses, profit levels, IVR filters, and more.
  • The software made as many trades as it could within the parameters given - does not factor in the market situation.

The Expectation of Having a Portfolio Drawdown

  • When trading options you will go through times where it feels like you cannot win on a trade.
  • You should expect to have a portfolio drawdown in your trading career.
  • Drawdowns are not a bad thing; can trade through these situations and still do really well.

Broad Average Results from Backtesting

  • The average drawdown at any one point in time was 13.88%.
  • Average time to recover from the biggest point of drawdown took 601 days or 1.65 years.
  • The average win rate was 70.38% over all iterations.
  • Average annual return of all the strategies 12.18%.

Worst Performing: Stop Loss Strategies

  • Largest drawdowns were seen in all strategies that had 1, 2, or 3X stop loss levels.
  • The math proves that using a stop loss creates more losing trades over time.
  • Strategies using stop losses had an average of 28.95% drawdown.
  • Time to recover when a stop loss was used was 913 days or 2.5 years.
  • Average win rate with stop loss strategies was 57.45%.

*Using stop losses dramatically decreases your win rate, increases the drawdown and time to recover. See show #67 backtesting results here.

Best Performing Strategies

  • IVR over 75th percentile/rank. Max average drawdown was 5.48%. Take advantage of high volatility times.
  • Weekly options (10 days on average). Had Average drawdown of 2.27%. However, they do not perform as well on a total P&L basis as a monthly option does over time [see episode 63].

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