OAP 095: Option Alpha’s NEW “Toolbox” For Backtesting Option Strategies

Download The "Ultimate" Options Strategy Guide

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.

Key Points from Today's Show:

Ground-Breaking Backtesting Software

  • Intuitive software that produces extremely powerful results.
  • Made up of two components:
  1. The ability to backtest different trades and strategies across different ticker symbols.
  2. 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 is the ability to test any trading strategy with a million combination 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

  • 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.


  • 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 parameters set.
  • Shows how the 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 every single month or losing. 
  • 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 the question of which is the best possible strategy for you 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 that strategy that works best for you.
  • You can make a decision based on which strategy best suits your personality and portfolio.

Using the Optimization Software:
1. Select an optimization factor - what you optimize your strategies based off of.
2. Choose a market a market outlook - bullish, bearish, or neutral.
3. Pick which type of account you have - margin, retirement.
4. Choose the market situation or setup - how far until expiration on average, and whether IV is low or high. 

Option Alpha Podcast Show Notes[FREE Download] Podcast Show Notes & Transcript PDF: No time to read the show notes right now? We've made it incredibly easy for you to save time by giving you instant access to the complete digital version of today's show. Click Here to Download Your FREE Copy

Free Options Trading Courses:

  • Options Basics [20 Videos]: Whether you're a completely new trader or an experienced trader, you'll still need to master the basics. The goal of this section is to help lay the groundwork for your education with some simple, yet important lessons surrounding options.
  • Finding & Placing Trades [26 Videos]: Successful options trading is 100% dependent on your ability to find and enter trades that give you an "edge" in the market. This module helps teach you how to scan properly for and select the best strategies to execute smarter option trades each day.
  • Pricing & Volatility [12 Videos]: This module includes lessons on mastering implied volatility and premium pricing for specific strategies. We'll also look at IV relativeness and percentiles which help you determine the best strategy to use for each and every possible market setup.
  • Neutral Options Strategies [7 Videos]: The beauty of options is that you can trade the market within a neutral range either up or down. You'll learn to love sideways and range bound markets because of the opportunity to build non-directional strategies that profit if the stock goes up, down or nowhere at all.
  • Bullish Options Strategies [12 Videos]: Naturally everyone wants to make money when the market is heading higher. In this module, we'll show you how to create specific strategies that profit from up trending markets including low IV strategies like calendars, diagonals, covered calls and direction debit spreads.
  • Options Expiration & Assignment [11 Videos]: Our goal is to make sure you understand the logistics of how each process works and the parties involved. If you don’t feel confident in the expiration processes or have questions that you just can't seem to get answered, then this section will help you.
  • Portfolio Management [16 Videos]: When I say "portfolio management" some people automatically assume you need a Masters from MIT to understand the concept and strategies - that is NOT the case. And in this module, you'll see why managing your risk trading options is actually quite simple.
  • Trade Adjustments/Hedges [15 Videos]: In this popular module, we'll give you concrete examples of how you can hedge different options strategies to both reduce potential losses and give yourself an opportunity to profit if things turn around. Plus, we'll help you create an alert system to save time and make it more automatic.
  • Professional Trading [14 Videos]: Honestly, this module isn't just for professional traders; it's for anyone who wants to have eventually options replace some (or all) of their monthly income. Because the reality is that mindset is everything if you truly want to earn a living trading options.

Option Trader Q&A

Remember, if you’d like to get your question answered here on the podcast or LIVE on Facebook & Periscope, head over to OptionAlpha.com/ASK and click the big red record button in the middle of the screen and leave me a private voicemail. There’s no software to download or install and it’s incredibly easy.

PDF Guides & Checklists:

  • The Ultimate Options Strategy Guide [90 Pages]: Our most popular PDF workbook with detailed options strategy pages categorized by market direction. Read the whole guide in less than 15 mins and have it forever to reference.
  • Earnings Trading Guide [33 Pages]: The ultimate guide to earnings trades including the top things to look for when playing these one-day volatility events, expected move calculations, best strategies to use, adjustments, etc.
  • Implied Volatility (IV) Percentile Rank [3 Pages]: A cool, simple visual tool to help you understand how we should be trading based on the current IV rank of any particular stock and the best strategies for each blocked section of IV.
  • Guide to Trade Size & Allocation [8 Pages]: Helping you figure out exactly how to calculate new position size as well as how much you should be allocating to your each position based on your overall portfolio balance.
  • When to Exit/Manage Trades [7 Pages]: Broken down by option strategy we'll give you concrete guidelines on the best exit points and prices for each trade type to maximize your win rate and profits long-term.
  • 7-Step Trade Entry Checklist [10 Pages]: Our top 7 things you should be double-checking before you enter your next trading. This quick checklist will help keep you out of harms way by making sure you make smarter entries.

Real-Money, LIVE Trading:

  • EWZ Iron Butterfly (Closing Trade): After nearly pinning the stock at our short strikes, and thanks to the volatility drop, we netted a $600 profit on this iron butterfly trade.
  • VXX Short Call (Closing Trade): One of the most consistent and profitable options trades we can make is shorting pure volatility with VXX and today we closed this naked short call in VXX after a couple days for a $420 profit.
  • DIA Iron Condor (Adjusting Trade): This neutral iron condor in DIA is need of a quick adjustment early this week as the market continues to rally. In this video, we'll discuss why I'm adding an additional put credit spread while also choosing NOT to close out of our current put credit spread due to pricing reasons.
  • COP Short Put (Closing Trade): These single short puts in COP acted as a great hedge for our other bearish bets in oil this month and helped smooth out our returns after we closed them for a nice big profit.
  • TSLA Put Debit Spread (Closing Trade): Although many people thought we were crazy for getting bearish in TSLA this pre-earnings put debit spread trade made us $200 today. After the huge run up from $140 to $260 and getting some technical sell signals, we were pretty sure this stock would pull back.
  • MON Iron Condor (Closing Trade): Following a huge drop in implied volatility we worked hard to close this MON iron condor trade adjusting the order multiple times to fill before the end of the day.
  • IBB Call Debit Spread (Opening Trade): We'll show you how I started searching for a new bullish trade and eventually found a low volatility trade in IBB looking for a move higher to hedge our portfolio.
  • TLT Iron Butterfly (Closing Trade): Following the Brexit vote TLT and bonds traded in a nearly $8 range really quickly - even still the drop in implied volatility helped generate a $330 profit for us.
  • XBI Call Debit Spread (Closing Trade): Got lucky picking the exact bottom for our entry in this call debit spread for the XBI biotech ETF which ultimately was closed for a profit of $165 today on the rally higher.
  • COH Iron Butterfly (Earnings Trade): Shortly after the market open we close out of our COH earnings trade for about a $160 profit, leaving just 1 leg on to expire worthless.
  • EWW Debit Spread (Closing Trade): Using some of the technical analysis signals we discovered in our backtesting research, we were able to make a quick $130 profit on this bearish EWW debit spread trade.
  • IBM Iron Condor (Earnings Trade): Shortly after the market opened you'll follow along with me as we watch volatility drop and liquidity come into the market before closing out the position for $250 profit.
  • SLV Short Straddle (Opening Trade): Using our watch list software we decided to continue to add to our existing SLV short straddle position with a new set of strike prices reflective of the move lower in the ETF recently.

Thank You for Listening!

I'm humbled that you took the time out of your day to listen to our show, and I never take that for granted. If you have any tips, suggestions or comments about this episode or topics you'd like to hear me cover, just add your thoughts below in the comment section.

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About The Author

Kirk Du Plessis

Kirk founded Option Alpha in early 2007 and currently serves as the Head Trader. In 2018, Option Alpha hit the Inc. 500 list at #215 as one of the fastest growing private companies in the US. Formerly an Investment Banker in the Mergers and Acquisitions Group for Deutsche Bank in New York and REIT Analyst for BB&T Capital Markets in Washington D.C., he's a Full-time Options Trader and Real Estate Investor. He's been interviewed on dozens of investing websites/podcasts and he's been seen in Barron’s Magazine, SmartMoney, and various other financial publications. Kirk currently lives in Pennsylvania (USA) with his beautiful wife and three children.