With an idea in hand, and a powerful back-tester to test it, we came across a fascinating 1x2x1x2 put spread that has been a beauty over the last 2-,3-, and 5-years. First, the Custom Strategy: The test, in English: * Buy a two-week (or whatever is closest) 40 delta put * Sell 2 30 delta puts (same expiration) * Sell a 22 delta put (same expiration) * Buy a 15 delta put (same expiration) This is a covered trade as it is long 3 options and short 3 options. Results Here are the results over the last 3-years Something to Think About While it's easy to dismiss this as working only because we are in a bull market, that's not quite true. This trade, at the top, is in fact a bearish position for a credit. (It's a 1x2 put spread). The bull market isn't the drive, but what has been is the lack of massive "black swan" drops. Having said that, no matter how bad the stock gap, this is a fully hedged position that does have a maximum loss. What Happened There's a lot less luck to successful option trading than many people realize. So... 1) Take a reasonable idea or hypothesis, test it, and apply lessons learned. 2) Identify profitable patterns that have repeated over and over again for years. This back-tester is from us (Capital Market Laboratories). You can se my footer to learn more about who we are." You can see this in actual action, here: http://bit.ly/elite_options (video in the middle of the page)
Was my first random choice. I don't like selling penny options, and weeklies would be that. I will try monthlies and three-week options too. This is why we built the back-tester and why it is the most heavily used option back-tester in the world.
This is a great study Ophir, thanks for sharing. Would you mind posting what a leveraged stock position in GOOGL, AMZN and SPY would have looked like over the past 3 years. If you have time, could you also back test this same strategy on Yahoo, QQQ, CSCO from the time period 1995 -2000? Thanks in advance