Stock Option Backtester Alibaba (NYSE:BABA) : The Exact Bearish Trigger
Date Published: 2019-01-28
DisclaimerThe results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.
PrefaceRecently we wrote on other technical set-ups:
* The Exact Bearish Trigger in Nvidia.
* The Technical Trigger to Find Bullish Bursts in Nvidia.
* The Exact Bearish Trigger in Netflix.
* The Exact Bullish Trigger in Amazon, Even During a Bear Market.
Alibaba is one of the most exposed companies to the Chinese economy in the world. Today we look at when a bearish trigger has worked.
The Short-term Bearish Option Trade in AlibabaWe will examine the outcome of going long an out-of-the-money (40 delta) put, in options that are the closest to 21-days from expiration. But we follow three rules:
* Never Trade Earnings
Let's not worry about stock direction or earnings, let's try to find a back-test that benefits from volatility. Here it is, first, we enter the long put.
That means the trigger waits until two days after earnings to even start a scan and closes any positions two-days before earnings -- that is the definition of "never trade earnings" for Trade Machine -- a four-day window around the event that is "hands off."
* Use a technical trigger to start the trade, if and only if these specific items are met. As of this writing, 1-28-2019, the conditions are satisfied, but since earnings are due out in two-days it does not trigger.
Wait until the day that the stock price crosses below the 10-day moving average and the stock is already below the 200-day moving average. Here is a nice simple image of the technical requirement:
Here is an example of the last six-months in Alibaba, and just a selection of the few times this trigger fired.
* Finally, we set a very specific type of limit:
* Use a 20% limit
* Close the trade after 10 trading days, if the limit has not been hit.
At the end of each day, the back-tester checks to see if the long put is up 20%. If it is, it closes the position. If after 10 trading days the limit has not been hit, the put is closed so not to suffer total time decay.
RESULTS FROM THE OPTION BACKTESTERHere are the results over the last three-years in Alibaba:
The mechanics of the TradeMachine® Stock Option Backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
Setting ExpectationsWhile this strategy had an overall return of 262%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 44.6%.
We also note that the one loss was a big loss -- the options dropped 90% in the ten trading day period.
Checking the Moving AverageYou can check moving averages for BABA on the Pivot Points tab on www.CMLviz.com.
If we look as of 1-28-2019 we see one condition is met (the stock is below the 200 DMA), but another is not met (the stock is above the 10 DMA):
Alert: Even if Alibaba drops below the 10 DMA tomorrow, we are now within the 2-days of earnings so that would not trigger a trade. The "never trade earnings" setting means this trigger is on hold until after earnings.
The best way to track it is to simply set an alert in Trade Machine, and when it happens (it will happen), you'll get notified. There's no use in staring at the screen, let Trade Machine® do the work for you.
WHAT HAPPENED: Option BacktesterTrade Machine gives you the capacity to trade beyond luck.
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You should read the Characteristics and Risks of Standardized Options.
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.