Trying to Gauge Options Trading Strategy Success

[misterkel]

S&P 500 6 month return is almost 9%. My 6th month return is about 46%. How do you gauge if the differential is luck or strategy? That is what I am trying to figure out.

That's easy. Compare the difference when there's a real pullback. What's your negative alpha vs your positive alpha in the upside?
In other words - 46/9= 400% alpha, 100% beta.
If the market drops 5%, do you lose 100% beta and more than 400% alpha? Or do you lose less?
I'd try to control the downside alpha as close to zero as possible, meaning I lose beta to the downside and win alpha to the upside.
I hope that makes sense.

 

[highonoptions]

That's easy. Compare the difference when there's a real pullback. What's your negative alpha vs your positive alpha in the upside?
In other words - 46/9= 400% alpha, 100% beta.
If the market drops 5%, do you lose 100% beta and more than 400% alpha? Or do you lose less?
I'd try to control the downside alpha as close to zero as possible, meaning I lose beta to the downside and win alpha to the upside.
I hope that makes sense.

This makes sense. Thanks for your input! I need to put the data to it, but just from watching, on some of the big down days we have had over the last 2 months, I.e. dow is down 5%, my account is typically down less than 1%.

 

[highonoptions]

You need to do more backtesting to test your strategy in all market scenarios to see how it would pan out. The most vulnerable part of your strategy is its inability to hedge against huge price crashes whether it's from the market or the stock itself. When facing a huge price downfall, neither the writing of the call nor the writing of the put will give you any protection. In fact the writing of the put will expose you to even more risk. So if I were you, I would pick a stock when it was in a downtrend or when it was experiencing a sudden price fall, try to find its option price history and then test your strategy using the option price history and to see how your strategy will pan out during these scenarios. If your strategy would not work out in these scenarios, then you know your current lucrative return is due to a bull market. And you shouldn't quit you day job to go into trading full time yet.

Got it. Thanks for your response. I tend to trade equities that have had a pretty bid downfall and to me (based on my research) seem oversold. Obviously the downside risk is always stock going to 0, but I try to put my money into companies that do not stand a chance of bankruptcy. Is there a software that can do backtesting for you, or do you have to manually get all of the data?