Developing a naked puts trading system

Discussion in 'Options' started by drmark27, May 3, 2017.

  1. drmark27

    drmark27

    I want to backtest naked puts. First I want to gather trade statistics to see if it seems viable for me. In this phase I do not want to apply any position sizing algorithm.

    What is the best way to do this?

    Thanks!
    Mark
     
  2. RedDuke

    RedDuke

    Get data either from CBOE or CME and give it a shot.
     
  3. Handle123

    Handle123

    Do you have millions in your account? Margins will be incredible.
     
  4. ironchef

    ironchef

    There are lots of studies on this subject. Some academic some from Wall Streets. Here are just two I read when I started trading options back in 2013:

    1. http://www.cboe.com/micro/put/PutWrite.pdf

    2. https://www.researchgate.net/publication/228289846_Why_are_Put_Options_So_Expensive

    # 2. is a well known paper by professor Bondarenko and a lot of put sellers quoted him and based their strategy on his research.

    If you want to do your own backtest, the historical data are expensive to gather and I gave up trying - Not worth the cost to me.

    Another point: #1. showed only modest outperformed over buy and hold the underlying, not the 20% a week outsize returns you read from some professional posters here on ET.

    I think you can make a decent living trading naked puts but you have to figure out how to prevent an occasional wipe out that seemed to affect many who shorted options: trades that have limited profits but occasional unlimited losses.

    Good luck.
     
    Gimpyron likes this.
  5. drmark27

    drmark27

    Consider this more of an academic exercise about trading system development than anything else for now. If the results look good then I'll think about viability.

    RedDuke and ironchef--I have option analytics software that gives me backtesting data to 2001.

    Handle123--requirements are significantly lower in a margin account.

    I want to focus specifically on how to conduct the backtest and I'll fill in a couple blanks. First, I will enter on every trading day because I want a large sample size. Second, I will sell the first put under X delta to keep probability of profit constant throughout the 15+ year sample. Third, I will exit when premium drops under $0.30 or just before the close on the final trading day. Fourth, this will be a daily backtest and I will collect all data at 15:30 ET.

    Any further suggestions would be appreciated.
     
    lindq likes this.
  6. RedDuke

    RedDuke

    Not really. CBOE data is really cheap multiple years under 1K. CME will cost about 5-6K for a number of years. Not that expensive at all considering that garbage data is useless for back test.
     
  7. lindq

    lindq

    And for put sellers, so is the suicide rate.

    You may take that as a joke. It isn't.

    Margin accounts and short puts do not mix well.

    Trade cash-secured, or not at all.
     
    SteveH likes this.
  8. Pekelo

    Pekelo

    Instead of naked puts, try selling vertical spreads. Less profit, but time works for you. Maybe the same system that doesn't work with naked puts would work with vertical spreads...
     
    beerntrading likes this.
  9. ironchef

    ironchef

    $1K is expensive.
     
  10. RedDuke

    RedDuke

    It is all relative. Garbage in, garbage out. Data that can not be relied on is useless. It will cost a not more when launched, unless it is done for fun on demo of course.
     
    #10     May 4, 2017