Many systems can be profitable over a short period. For example, in a general bull market period (2009 to present), shorting puts or long calls would be net positive. However, my backtesting indicated naked puts were very profitable but most us retail guys could only trade cash secured puts and with that we tied up a lot of cash so the advantage over buy and hold disappeared. For many strike prices, especially ITM cash secured puts were inferior to buy and hold. To me that means the market is efficient and the market makers, counter parties are not dummies. Tastytrade said people purchased puts did it as portfolio insurance so they were willing to pay? In general that meant hedge funds and institutions were willing to overpay just to be safe?
drcha and VIXTrader, I have a question for you regarding backtesting: I could get historical stock price, historical volatility #, a historical call/put implied volatility #, interest rate and dividend rate but could not find historical option strike prices. So, when I backtest, I used historical implied volatility, historical interest rates, historical dividend rates and Black Scholes to calculate the option prices. How much can I trust the results since I was missing volatility skews/smiles and accepting the approximations of a Black Scholes. And are there better ways to backtest? Thank you for your thoughts.
"So, when I backtest, I used historical implied volatility, historical interest rates, historical dividend rates and Black Scholes to calculate the option prices. How much can I trust the results since I was missing volatility skews/smiles and accepting the approximations of a Black Scholes. And are there better ways to backtest?" I commend you on your effort, but damn you're making it way harder than it has to be my friend. Open an account with TD Ameritrade and use the ThinkorSwim platform. They have 5 years of data that can be trusted. If you want to go back further than 5 years, you'll probably have to use a paid service, which are out there. You can get option pricing going back 10+ years if you're willing to pay a bit for it. For me since I've actually been option trading for nearly 20 years with 5 or 6 systems that haven't changed much over the years, I don't really need to go back further than 5 years on my testing but I've seen several people on this forum reference that they do. Perhaps someone will be along to give you the name of a really good service that dates back 10+ years. For now, ThinkorSwim will do just fine.