Sunday, July 26, 2009

A simple way to Backtest Option Straddles

Here, I show how one could follow a simple approach to backtest the profitability of Option Straddles. Straddles are a way to get exposure to volatility of a stock. A Long Straddle means buying an AT-THE-MONEY CALL and PUT option of the same expiration date. Vice versa for a Short Straddle position.

TO profit from a straddle position, One should be able to calculate, historically, how many times did the stock move beyond the premium one would pay for the STRADDLE Position. For example, If a Straddle on a stock costs $4, It makes sense to check how many times in the past did the stock move more than $4, UP or DOWN. I.e if the option expires in 30 days, one needs to find out on any given 30 days in the past, how many times has the stock moved beyond $4. This is only one of the many things one needs to do before buying or selling straddles. This combined with the Volatility Cones and calculation of "Average" spread between Realized Volatility and Implied Volatility should give an investor some information to trade them. One can also look into "Strangle".

Here is a figure that shows a stocks historical movements over the past 3 years for a 30 day rolling window period.

One can see from the chart that in the past 3 years, CNH has moved beyond $5 only 50% of the time, 60% more than $3.8, 70% more than $2.66 etc. So if a straddle costs only $2.66, then Historically, 70% of the time it has moved more than $2.66 in 30 days. On the other side, there is still a 30% chance that it will not move beyond $2.66.




vJD said...

I would be interested in a more general option-strategy backtesting framework under MATLAB/Octave.

Do you have a hint where one can find one? Or do you plan to extend on this one?


jbr said...

Unrelated to this post but was wondering if you could help suggest a way to get free option/implied vol historical data? I use Matlab's datafeed toolbox to get stock quotes from but don't know where to get historical option data.


s said...

I see that you analyze lot of etf's and general stochastics such as vix etc. Is there a reason you do not do any stock specific scans? Is this something you tried and found it does not work or something you mean to?
Great blog.

I am very familiar with Matlab and use it often. I have been intending to use the financial toolbox and analyze stock charts. Your response might help my effort.


garamchaye said...

TSR NIFTY UPDATES- Week beginning 26.10.09 -Visit Charts attached


Financial Blogging is not easy.To make sure you keep getting our views invite people using

Dear friends,
It is probably for the first time that a government-investigating agency has raided a government department for alleged misappropriation of funds. The classical signs of the halt of the Short term Bullish upmove were visible last week. LT, which has a shareholder approval for an equity dilution since eighteen months, raised money last week. With a TTM pe of 20X, LT would have to ensure a 20 percent growth in coming quarters on a year on year basis.
JaiPrakash associates and Unitech are raising fresh funds through fixed deposit receipts from the general public. The interest rates appear attractive on a three year term basis. At the same time the interest rate cycle is expected to move to a higher trajectory from March 2010. At the same time there is no guarantee that companies like Unitech, which failed to deliver projects on time, will ensure that funds will be refunded on time. Moreover it is surprising that Unitech with its debt: equity ratio of 0.4X after telenor deal is in a hurry to raise funds 200 basis points above the BPLR. What I suggest people who are looking for higher yields is Invest funds in short term liquid funds which will give an annual return of 6% till march. As the interest rates cycle starts an uptick the yields from these funds will start improving. Moreover when the Interest rate cycle is near its upper zone one can lock the money in long term Fixed deposit receipts of banks.
At the same time at the end of three years if the financials of the above companies improve investments in the shares of these companies would be a far better prospect. If you invest in a corporate FDR you are unable to liquidate your holdings once these companies turn around for the worst. A shareholder through his access to stock markets at any point of time can dump his holdings.
In coming days be ready for a sideways market unless 4900 is broken on the downside. The RBI policy announcement on Tuesday should be contraction oriented and not expansionary in nature. Hike in CRR is a possibility and the timing of the same can be questioned.

NIFTY SUPPORT:- 4921,4874

Nifty resistance :-5083,5115

Bullish and bearish stocks Uploaded every day at


PROFIT 82945 = IN 1 LOT








More then 72% accuracy in SEPTEMBER series in Intraday calls.Check day by day sheet at .

Be a TSR premium delivery client for as low as 650 per month on annual subscriptions

Get free updates on your mobile phone. SMS- JOIN Sresearchers to 567678.for our market updates
We are giving a free trial to register FOR FREE TRIAL using your phone, SMS 'ON SRESEARCHERS' to 09870807070.


If you want this newsletter to be delivered in your mailbox - Please subscribe

If You like the NiftyViews Blog kindly let others know about the same.invite people using


email to for payment details of our premium membership




Your feedback is important to me :-). Please share your comments.

stock market trading said...

Stock market trading can be done through a stockbroker who will probably charge you certain commission fees. A broker may be employed by a brokerage company.

Options Trading said...

Stock options are wonderful financial instrument and tool and Options Trading can protect us from some unwanted scenarios when for example price movement of stock doesn't go in direction we would want. Also risk from point of amount of money we put to options trade is much less then with comparison with shares.

Emma said...

Awesome. Options trading can be done successfully with the help of a professional broker or an effective trading system. The strategy that you have discussed is somehow new to me as I never heard about it. Thanks for sharing about it.
online trading reviews

jyoti yadav said...

Equity tips for today
BUY UNITED SPIRITS FUTURES ABOVE 2635 TG-2660/2700/2750 SL-2609(CMP2633) Best nifty option tips provider

KLSE Stock Analysis said...

If it has moved beyond $5 only 50% of the time, in the past 3 years, then it is definitely be a profitable step for the investors as it would go more high.

Blogger said...

Quantum Binary Signals

Professional trading signals sent to your cell phone every day.

Follow our trades right now & gain up to 270% per day.

jojo said...

شركة الاول للتنظيف و مكافحة الحشرات شركة الاول للتنظيف و مكافحة الحشرات
شركة جلي بلاط بالرياض شركة جلي بلاط بالرياض
افضل شركة تنظيف اثاث بالرياض افضل شركة تنظيف اثاث بالرياض
شركة تنظيف مجالس بالرياض شركة تنظيف مجالس بالرياض

أفضل شركة تنظيف بالقصيم  أفضل شركة تنظيف منازل بالقصيم 
شركة مكافحة حشرات بالقصيم افضل شركة مكافحة حشرات بالقصيم