Optionetics Platinum Help - Quick Search Experiments

Backtest experiments with Quick Search

The Optionetics Platinum section of the Optionetics.com web site allows you to go back in time and experiment with options. This is a great way to get "a feel" for how different options strategies behave while risking no money. Take a look at a chart of Texas Instruments (TXN). You can do this from Optionetics Platinum by:

Log into the platinum site from http://platinum.optionetics.com/
Change the date selection box to 07-06-00. (If 07-06-00 does not appear in your selection box, click the ALL DATES button just to the left of the dates.)
Type "TXN" in the stock symbol box (no quotes) and click Create "An Option Trade" button (just under the "My Personal Data" button.)

After inspecting the price chart we can see that TXN went from the mid 80's on June 2, 2000 to the mid 60's on July 5 2000. Let's perform a few experiments with the "Quick Search" feature of Optionetics Platinum on June 2, 2000. We know beforehand that the stock went down 20 points. What we want to do is see how different option trades found by the web site would have performed over this period.

To find option trades the user must tell the web site his/her criteria. This means that the web site needs your views on the stock before it can try to help you find a trade. There are two programs on Optionetics Platinum that can find trades:

Quick Search
Create a Search.

"Quick Search" is easy to use but is limited in scope. "Create a Search" allows you to enter exact search specifications, and as a result is more complicated. In this article we will be using the Quick Search.

We will be trying three experiments. We will assume we are bullish, neutral and bearish on June 2. We will then use the backtest feature of the site to examine the top trade for each market bias, and determine the damage or the reward for each trade on July 5, 1 month later.

A Bullish Quick Search

We are now ready to enter our market bias for TXN stock. Let's start by being bullish.

Click on the "Welcome Screen" link in the upper left hand corner of the screen.
Change the date selection box to 06-02-00. (If 06-02-00 does not appear in your selection box, click the ALL DATES button just to the left of the dates.)
Type "TXN" in the stock symbol box (no quotes).
We want the Quick Search selection boxes to read: "I predict Stock in the text box will Go Up for the next 30 days, then randomly thereafter. Rank trades that expire between 30-60 days using High Reward/(-Risk) while risking less than $1000."
Click the button: Do a Quick Search.

For those of you that want to know what is going on behind the scenes, "Go Up for the next 30 days" means to search calls, and bullish put and call vertical spreads, and project the stock price up 1/2 of a standard deviation 30 days from now. "Rank trades that expire between 30-60 days" means to use options that expire in that range.. "High Reward/(-Risk)" is trying to maximize reward and minimize risk at the same time. "While risking less than $1000" simply means that we want a hard limit on risk of $1K.

Recapping, we are ASSUMING the stock will be higher in 30 days and finding trades that make the most money if this assumption comes true. Since TXN went down, we should expect the bullish trades to get hit pretty hard. Let's now get our search results:

The top ranked trade is a July 90/95 Call Debit spread. On this trade we pay $175 and have a possible profit of $325. The max profit happens if TXN is above 95 at expiration in 49 days. In the table you can see that the projected price of TXN stock was about 97 after 30 days, so the program thinks this trade is the best one assuming TXN goes to 97.

Let's now find out what actually happened to this trade. We must first save the trade. To save the trade we do the following:

Click on the link "Call Vert (Debit) Spread"
Scroll to the bottom and Click "Save Option Trade."

Now that this trade is saved, we can forward test it from June 2 to July 5:

Click the ALL DATES button in the center of the screen.
Scroll down to the section titled "Backtest My Trades"
On the right hand side, select Trade #1,
Select a start date of 06-02-00 and an end date of 07-05-00.
Click the Multiple Day Analysis button.

The following will result:

Date       Stock   ATM IV     Quote    MQuote      Profit     MProfit
06-02-00  85 11/16   60.3%     1 3/8   1 11/16 $    -37.50 $     -8.22
06-05-00        84   60.4%     1 1/4     1 1/2 $    -50.00 $    -26.25
06-06-00    80 1/2   60.7%     13/16    1 3/16 $    -93.75 $    -57.89
06-07-00    82 7/8   60.9%         1     1 3/8 $    -75.00 $    -38.08
06-08-00    81 3/4   60.5%       3/4     1 1/4 $   -100.00 $    -49.89
06-09-00    83 3/4   59.0%     1 1/4    1 7/16 $    -50.00 $    -33.38
06-12-00    79 1/8   59.2%        NQ       7/8 $        NQ $    -85.02
06-13-00    83 1/4   60.1%         1    1 5/16 $    -75.00 $    -43.25
06-14-00    81 7/8   60.2%     15/16    1 3/16 $    -81.25 $    -55.77
06-15-00    80 1/2   61.2%     15/16    1 1/16 $    -81.25 $    -66.47
06-16-00        82   59.4%     13/16    1 1/16 $    -93.75 $    -67.15
06-19-00    87 3/4   56.0%     1 5/8     1 3/4 $    -12.50 $     -0.13
06-20-00    86 7/8   53.9%    1 9/16     1 5/8 $    -18.75 $    -11.91
06-21-00        82   63.0%   1 13/16     1 3/8 $      6.25 $    -35.22
06-22-00    81 5/8   55.9%     11/16       3/4 $   -106.25 $    -97.04
06-23-00    75 3/4   56.7%      7/16       3/8 $   -131.25 $   -134.73
06-26-00    74 3/4   64.6%      7/16      7/16 $   -131.25 $   -128.51
06-27-00    71 3/4   65.2%      5/16      5/16 $   -143.75 $   -146.08
06-28-00    71 5/8   64.4%      3/16       1/4 $   -156.25 $   -150.82
06-29-00        69   64.7%       1/8      3/16 $   -162.50 $   -158.89
06-30-00  68 11/16   65.9%       1/8       1/8 $   -162.50 $   -160.95
07-03-00        69   66.7%       1/8       1/8 $   -162.50 $   -164.65
07-05-00    65 3/4   72.9%     -1/16         0 $   -181.25 $   -174.18

From the Stock price column we can see that TXN did indeed fall 20 points over this period. The "ATM IV" column is the at the money implied volatility for TXN options over this period. It was fairly steady with a higher mild bias. The Quote and MQuote columns show what we will receive for our options if we exit the trade. "Quote" means actual quotes, while "MQuote" means mathematically derived quotes. We paid 1 3/4 and on 6-02-00 we can sell it for 1 3/8. Since this is the day we put the trade on, we are seeing the bid/ask spread (1 3/8 to 1 3/4). On July 5 the trade has declined to essentially 0. We are showing -1/16 which is a minor price discrepancy. The trade looses the full amount we paid: $175.

A Neutral Quick Search

Now let's try a different scenario. Let's assume we are neutral on June 2, and find trades with that market bias.

Click BACK on your browser.
Click the Welcome Page link at the top left hand corner.
Change the date selection box to 06-02-00. (If 06-02-00 does not appear in your selection box, click the ALL DATES button just to the left of the dates.)
Type "TXN" in the stock symbol box (no quotes).
We want the Quick Search selection boxes to read: "I predict Stock in the text box will Go Sideways for the next 0 days, then randomly thereafter. Rank trades that expire between 30-60 days using High Reward/(-Risk) while risking less than $1000."
Click the button: Do a Quick Search.

"Go Sideways for the next 0 days" means to search butterfly spreads, and not to project the stock price at all. The stock price is assumed randomly and varies from the beginning. Let's now get our search results:

The top trade is an 80/85/90 butterfly. It will cost you $50 and give a max profit of $436 if TXN is exactly at 85 on the July expiration day. Going through the steps we did before, we get the following table:

Date       Stock   ATM IV     Quote    MQuote      Profit     MProfit
06-02-00  85 11/16   60.3%       1/8       1/2 $    -37.50 $      2.22
06-05-00        84   60.4%         0      9/16 $    -50.00 $      3.76
06-06-00    80 1/2   60.7%      -1/8       1/2 $    -62.50 $      0.92
06-07-00    82 7/8   60.9%      -1/4      9/16 $    -75.00 $      4.07
06-08-00    81 3/4   60.5%      -1/4      9/16 $    -75.00 $      4.16
06-09-00    83 3/4   59.0%      -1/8      9/16 $    -62.50 $      7.80
06-12-00    79 1/8   59.2%        NQ      9/16 $        NQ $      7.30
06-13-00    83 1/4   60.1%       1/4       5/8 $    -25.00 $     11.34
06-14-00    81 7/8   60.2%      -5/8      9/16 $   -112.50 $      8.97
06-15-00    80 1/2   61.2%      3/16      9/16 $    -31.25 $      5.76
06-16-00        82   59.4%      -1/8     11/16 $    -62.50 $     18.09
06-19-00    87 3/4   56.0%       3/8       3/4 $    -12.50 $     22.16
06-20-00    86 7/8   53.9%       1/8       3/4 $    -37.50 $     22.94
06-21-00        82   63.0%       5/8      7/16 $     12.50 $     -5.94
06-22-00    81 5/8   55.9%      3/16       7/8 $    -31.25 $     35.46
06-23-00    75 3/4   56.7%      9/16      9/16 $      6.25 $      6.39
06-26-00    74 3/4   64.6%      1/16       1/2 $    -43.75 $     -0.64
06-27-00    71 3/4   65.2%       1/4       3/8 $    -25.00 $    -10.57
06-28-00    71 5/8   64.4%      3/16       3/8 $    -31.25 $    -11.06
06-29-00        69   64.7%       1/8      5/16 $    -37.50 $    -20.34
06-30-00  68 11/16   65.9%       1/4      5/16 $    -25.00 $    -21.76
07-03-00        69   66.7%      3/16       1/4 $    -31.25 $    -22.53
07-05-00    65 3/4   72.9%     -3/16      1/16 $    -68.75 $    -41.01

On this trade we will lose $50 if TXN is below 80 at expiration. We will make the max profit if TXN is at 85. Since the stock actually varied from 80 to 87 over the period 6/2 to 6/22, the trade doesn't do bad observing the mathematically derived numbers. The quotes are pretty poor over this time period, probably due in large part to the bid ask spread of the trade. On July 5, the trade was down $41, $9 shy of max loss.

A Bearish Quick Search

Let's now assume we are bearish on June 2, and find trades with that market bias.

Click BACK on your browser.
Click the Welcome Page link at the top left hand corner.
Change the date selection box to 06-02-00. (If 06-02-00 does not appear in your selection box, click the ALL DATES button just to the left of the dates.)
Type "TXN" in the stock symbol box (no quotes).
We want the Quick Search selection boxes to read: "I predict Stock in the text box will Go Down for the next 30 days, then randomly thereafter. Rank trades that expire between 30-60 days using High Reward/(-Risk) while risking less than $1000."
Click the button: Do a Quick Search.

"Go Down for the next 30 days" means calls, and bearish put and call vertical spreads, and project the stock price down 1/2 of a std deviation 30 days from now. Let's now get our search results:

The top trade is an 80/85 Put Vertical Spread. It will cost you $237 and give a max profit of $262 if TXN is below 80 on the July expiration day. Going through the steps we did before we get the following table:

Date       Stock   ATM IV     Quote    MQuote      Profit     MProfit
06-02-00  85 11/16   60.3%         2    2 5/16 $    -37.50 $     -7.65
06-05-00        84   60.4%     2 1/8     2 1/2 $    -25.00 $      9.68
06-06-00    80 1/2   60.7%     2 1/4     2 7/8 $    -12.50 $     48.62
06-07-00    82 7/8   60.9%     2 3/8     2 5/8 $      0.00 $     21.97
06-08-00    81 3/4   60.5%     2 3/8     2 3/4 $      0.00 $     34.50
06-09-00    83 3/4   59.0%     2 1/2     2 1/2 $     12.50 $     11.01
06-12-00    79 1/8   59.2%         3         3 $     62.50 $     65.53
06-13-00    83 1/4   60.1%     2 1/4    2 9/16 $    -12.50 $     17.80
06-14-00    81 7/8   60.2%     2 1/2   2 11/16 $     12.50 $     32.80
06-15-00    80 1/2   61.2%     2 3/4     2 7/8 $     37.50 $     50.05
06-16-00        82   59.4%     2 5/8   2 11/16 $     25.00 $     32.85
06-19-00    87 3/4   56.0%   1 11/16   1 15/16 $    -68.75 $    -44.27
06-20-00    86 7/8   53.9%     1 3/4   1 15/16 $    -62.50 $    -43.32
06-21-00        82   63.0%     1 5/8     2 5/8 $    -75.00 $     24.47
06-22-00    81 5/8   55.9%     2 7/8     2 3/4 $     50.00 $     37.11
06-23-00    75 3/4   56.7%     3 3/4    3 9/16 $    137.50 $    118.14
06-26-00    74 3/4   64.6%     3 3/8   3 11/16 $    100.00 $    130.71
06-27-00    71 3/4   65.2%     3 7/8    4 1/16 $    150.00 $    167.71
06-28-00    71 5/8   64.4%     3 3/4    4 1/16 $    137.50 $    170.75
06-29-00        69   64.7%        NQ    4 7/16 $        NQ $    203.74
06-30-00  68 11/16   65.9%        NQ    4 7/16 $        NQ $    206.46
07-03-00        69   66.7%         4    4 7/16 $    162.50 $    207.62
07-05-00    65 3/4   72.9%        NQ     4 1/2 $        NQ $    213.02

From the Profit column, we can see that the trade looked "iffy" until about 6/23. Then it hit the jackpot. One or both of the trade legs was missing quotes on 3 days at the end. This is why we have the mathematically derived columns. The "MProfit" column shows that we are closing in on the max profit of $262. It's not exactly $262, because the trade still has 2 weeks to expiration.

The objective of this article was to show the quick search features. It's a quick way of finding a bullish or bearish trade if you are so inclined, but always remember, the program's trades will always reflect your views of the market. If you are wrong, the trades will likely loose money. I f you are right, you will likely profit.