Backtest Your Options

CHERRY PICKS RIPE & JUICY TRADE IDEAS

Backtest and Forward Test with Lookback

See how a strategy performs before risking money on a trade

By Michael Rechenthin

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ookback, a free options analysis tool from tastytrade, provides two ways of examining the profit and loss around an options strategy: the backtest and the forward test.

Type in the strategy, and lookback will review up to 15 years of data to uncover the strategy’s track record.

But historical results are just that: history. A backtest would “prove” that a bullish 35-delta short put has outperformed a less-bullish 15-delta short put in the S&P 500 over the past 10 years. But with the market’s tremendous rise, simply noting outperformance of bearish strategies doesn’t provide actionable insight.

For traders who want to bet on a future market decline, a backtest might not be relevant. Instead, they may want to try another feature of lookback: the forward test.

Forward testing helps traders see the probabilities of a particular outcome. For example, under the “Forecasted Profit/Loss” tab, the user can see the results of an options strategy all the way to expiration.

Hover the cursor over a price estimate for a particular date, and lookback uses an options pricing model to calculate the projected outcome of profit and loss and the current probability of reaching that price.

Here’s an example: For an S&P 500 (SPY) short 445 (35 Delta) call option with 53 days to expiration, lookback projects a 64% probability of landing below 445 by expiration, meaning a full profit of $888.

Not convinced forward testing is important?

Check out the “Analysis” tab and see the hockey stick graphic. This flipped graph shows stock price on the horizontal axis instead of in its more usual vertical position. By moving the cursor to an estimated outcome, traders can clearly see the theoretical performance along with an estimation of options’ Greek values.

To take trade examination to the next level, use the “Advanced” button on the “Analysis” tab. By moving the red line from left to right, traders can change the date from present day all the way to expiration.

The upshot? Traders can check their options ideas at tastytrade.com/lookback to find out how those strategies perform before allocating their capital.

Michael Rechenthin, Ph.D. (aka “Dr. Data”), is head of research & development at tastytrade. @mrechenthin

Forward testing

The lookback tool indicates probabilities of future stock movement.

Chain

March 23

Price: $445.00 Expected return: $887.76

Forecasted Profit/Loss

6 MONTHS 1 DAY

Analysis Backtest

36%

64% 552 534 516 499 481 463 446 428 411 393 375 358 340 322

305

Source: slopecharts.com

Advanced analytics

Advanced features in lookback allow for detailed probability analysis.

Chain

Beginner Advanced Cumulative % P/L Bell Curve

Forecasted Profit/Loss Analysis

Select date

Backtest

February 17

P/L: Cumulative %: P/L Standard deviation: $445.63 50% 1.05K

Move along the curve to show specific profit and loss and associated probability on a chosen date.

See the standard deviation of profit and loss.

100 90 80 70 60 50 40 30 20 10 0

$-10.5K $-9.88K $-9.23K $-8.57K $-7.92K $-7.27K $-6.62K $-5.96K $-5.31K $-4.66K $-4.01K $-3.35K $-2.7K $-2.05K $-1.4K $-743.45K $-90.87K $ 561.71K

Source: tastytrade.com/lookback

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