New Toolbox for Backtesting Option Strategies

It's finally here! After years of research, development, and testing the doors are open to purchasing access to our incredible new options backtesting and trade optimization software we're calling the "Trader's Toolbox". Given that we've now got a whole suite of tools and scanners for you to use we have to consolidate it under one roof which is why we believe having a Toolbox is the most clear and logical route. You can learn more about the new software release including demos for by clicking here.

In this post, you will find:

An overview about backtesting and how it can help investors of all types
A podcast explaining how Option Alpha’s Toolbox for Backtesting will improve your investment strategies
A summary transcript of the podcast

Investors know that they can look to historical data for insights. This is nothing new.

Many times, when you go to make a trade, you have very little data about what has happened in the past. Or you have so much data that you become overwhelmed and don’t know where to begin.

Investors have always been able to run the numbers themselves and ask questions like:

"If I had traded this stock on this day at this price, would I have made money?"

"If I had traded this option in this way, would I have won?"

But doing this manually, of course, has its limitations. Backtesting software is now available to streamline this process and enable investors to test an infinite number of scenarios.

What is Backtesting?

Backtesting is the process of using historical data to reconstruct trades in the past using rules defined by a given strategy. Investors can form hypotheses about the cause and effect relationship between a number of financial variables and then use those insights to assess the effectiveness of various investment strategies.

Said simply, backtesting is a what-if analysis.

Backtesting is a critical step in designing trading strategies. When you backtest, you identify ideas to call upon any time certain predetermined conditions of that strategy are met.

You might apply one strategy to a single stock, but other strategies can prove to be viable across asset classes or entire sectors.

Backtesting is all about testing the viability of your trading strategies. Of course, historical results in no way guarantee future results, but are one element that can be used to assess different ideas.

How Can a Beginner Use Backtesting?

When it comes to options trading - especially for beginners - backtesting is your friend.

In fact, it is a must to enhance your options trading skill set.

By testing various strategies on potential setups in the past, you can understand how those setups might behave in the future. Backtesting different strategies will make you a better options trader at the end of the day.

Software enables investors to run different scenarios as many times as they like.

Start with a trade 20 minutes before earnings are released with an iron condor, for example. See how it plays out. You can then fast forward to the next day. See whether you’d win or lose. Reset and start over by changing the following variables:

Play with different trade times – try 15 minutes prior or 25 minutes prior
Change the iron condor to a strangle

Even if you lose, you can run different scenarios for how you’d exit the trade to minimize the loss.

As you play with backtesting, you will begin to:

Ask intelligent trading questions. What if I buy a dip when everyone else is selling?
Understand how complex market variables like delta and implied volatility impact the trade

The Trader’s Toolbox

If this sounds interesting to you, keep reading to learn more about backtesting and listen to Option Alpha’s podcast about how you can use the Trader’s Toolbox to test trading strategies.

Option Alpha’s Head Trader, Kirk Du Plessis, discusses the “why” behind the creation of this backtesting software. According to Top Trade Reviews, Du Plessis is “a great instructor with a knack of simplifying complex strategies.” Listen to the podcast to understand his excitement about:

Sharing the ability to test an infinite number of trading combinations
The Trader’s Toolbox and how it will revolutionize the trading experience
Backtesting and the potential it unleashes; e.g. the one tweak that can generate 314% more income
How the extremely complex process of options trading has been distilled and simplified for Option Alpha users through the Trader’s Toolbox
A trader from Seattle who said, “I can’t believe I’m saying this now, but I nearly gave up options trading 3 months ago. However, since I started using the [Option Alpha Toolbox] backtester, I’ve seen a complete 180 in my portfolio. Last week I was up $1294!”
Reviews like this one: “Option Alpha gave me the tools I needed to start trading options for myself. All of the content is laid out in a way that is visually appeasing, and easy to navigate.”

After years of research, development and testing, the doors are now open to purchasing access to Option Alpha's incredible new options backtesting and trade optimization software called the "Trader's Toolbox". Given that we've now got a whole suite of tools and scanners for you to use, we have consolidated these tools under one roof - the Toolbox.

See which strategies work better than others, test how different stocks react during different time frames, and just have fun creating and testing new strategies!

If you’re looking for data-based investing guidance and not just theory, you’re in the right place.

If you want to stop trading using disorganized and blind investing strategies, you’re in the right place.

If you want a complete set of trading tools that can help you scan, backtest and optimize your trading strategies, you’re in the right place.

You can learn more about the new software release and view demos for the Toolbox by clicking here.

Ground-Breaking Backtesting Software

The intuitive software produces extremely powerful results and is made up of two components:

The ability to backtest different trades and strategies across different ticker symbols.
Trade optimization software.

The Trader's Toolbox

The toolbox consists of two versions, Toolbox Light and Toolbox Plus.
The Toolbox Light purchase comes with access to the watchlist and the earnings calendar.
The Toolbox Plus includes the backtesting software and the trade optimization software.

Backtesting Software

The backtesting software itself unlocks the ability to test any trading strategy with infinite combinations of variables across different tickers and frequencies.
The software is set up in two steps:

Step 1:

Choose a strategy to test.
Choose a specific ticker symbol.
Choose the frequency variables; daily, weekly, or sequential.

Step 2:

Choose days until expiration on average, from 10 to 80 days.
Choose minimum implied volatility level.
Choose a starting portfolio value.
Choose your overall allocation, between 10 and 50%.
Choose the profit-taking exit; 25, 50, or 75%.
Choose a stop loss or none.
Choose the strategy-specific parameters, at the money or out.

SPY Backtest Example

Did a weekly SPY short straddle, 40 days to average expiration.
No IV rank, 20% overall, which means 80% of our portfolio sits in cash during this time period.
Profit-taking at 25%, and no stop loss level.
Short strikes at a 50 Delta, effectively selling at the money options.

Results:

Total return for this strategy was 79% over the testing period.
6% annual CAGR, which is a compound growth rate.
Sharpe ratio was 1.67%, with a smooth, steady equity curve that outperforms the market.
Total profit of $197,000 with a starting portfolio of $250,000.
22% drawdown that only lasted for 32 days, which is really low.

Performance Page

Allows you to print on PDF.
Shows total profit, and annual compound growth rate, which is indicative of how a strategy will perform long term.
The Sharpe ratio is really important in the financial space, especially in the hedge fund and investment space; it is a measure of risk-adjusted returns.
High Sharpe ratios are indicative of getting a lot of excess return for not taking on too much excess risk.
The strategy is graphed out, compared to the S&P to see the return values.
Consistency metrics are also shown, displaying how often the strategy won based on the parameters.
Shows how distribution of monthly returns affect the portfolio and average monthly gain.
The drawdown days were calculated to show how many days it took to recover from drawdowns.
A table of monthly distributions shows how often you are gaining or losing every single month .
The final table shows all the monthly return numbers, as well as the annual return for each year.

Optimization Software

The software was built to answer this question: what is the best possible strategy at this exact moment?
The software gives you all the information you need to make a trade based on whatever market conditions are present right now, at this exact moment.
It is not just about one strategy; it is about figuring out the strategy that works best for you.
You can make a decision based on which strategy best suits your personality and your portfolio.

Using the Optimization Software:

Select an optimization factor depending on how you optimize your strategies.
Choose a market outlook - bullish, bearish, or neutral.
Indicate which type of account you have - margin, retirement.
Choose the market situation or setup - how far until expiration on average, and whether IV is low or high.