Option Backtester The Technical Trigger to Find Times to Be "Not Bearish" in Amazon $AMZN - Credit Spreads
Option Backtester The Technical Trigger to Find Times to Be "Not Bearish" in Amazon - Credit Spreads
Date Published: 2019-03-07
Disclaimer
The 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.Lede
In option trading we don't always have to take a firm bullish or bearish stance. It can be less formidable to simply take a position of "not bearish" for a short burst of time, namely one week. Today we will also show how it can be much more profitable than getting long calls, when used selectively.Today we demonstrate the technical conditions that satisfy that belief system for Amazon.com (NASDAQ:AMZN) by use of back-testing selling credit spreads. This is the same strategy we used when we examined Alphabet Google (NASDAQ:GOOGL).
This is also a reminder that an option strategy doesn't always have to simply buy options, spreads can be fabulous strategies as well.
Preface
Build a portfolio of option set-ups, diversified not just by ticker, but by strategy. It's in this process that we identify the times were short bursts of risk exposure have been profitable in the past.With that, we build a portfolio of alerts. Here is a selection of recent insights.
* Bullish Trigger in Microsoft (MSFT).
* Bullish Trigger in Lam Research (LRCX).
* Bullish Trigger in Apple (AAPL).
* Bullish Trigger in Roku (ROKU).
* 'Not Bearish' Trigger in Google (GOOGL).
* Bullish Trigger in Shopify (SHOP).
* Bullish Trigger in Palo Alto Networks (PANW).
* Bullish Trigger in Google (GOOGL).
* Bearish Trigger in Twitter (TWTR).
* Bearish Trigger in Micron (MU).
* Bullish Trigger in Microsoft (MSFT).
* Bearish Trigger in Alibaba (BABA).
* Bearish Trigger in Nvidia (NVDA).
* Bullish Trigger in Nvidia (NVDA).
* Bearish Trigger in Netflix (NFLX).
* Bullish Trigger in Amazon (AMZN).
The goal is to create a portfolio of backtests with alerts attached to them, so we don't have to stare at the screen all day, but rather Trade Machine is the work horse to notify when the ideas become actionable.
The Short-term "Not Bearish" Option Trade in Amazon
We will examine the outcome selling an out-of-the-money put spread (the strike price set to the 40 delta is sold and the 20 delta is purchased) in options that are the closest to 7-days from expiration. This is a credit spread -- meaning the seller receives a credit for the sale. But we follow three rules:* Never Trade Earnings
Let's not worry about earnings and focus on a short put spread. In this case, selling a 40 delta put and buying a 20 delta put.
* Use a technical trigger to start the trade, if and only if these specific items are met. As of this writing, 2-23-2019, the conditions are not yet satisfied.
* Wait until the day that the stock price crosses above the 21-day exponential moving average (EMA).
* The stock price is also above the 50-day simple moving average (SMA).
* Finally, to prevent a trigger during an overbought period, we set the RSI (using 20-days) below 70.
Here is a nice simple image of the technical requirement:
You can set an alert in Trade Machine®, which will track all of these moving parts for you, and message you when it triggers. In fact, you can do this with a portfolio of stocks for a portfolio of bullish and bearish triggers. Let Trade Machine do the work for you -- there's no need to stare at the screen.
* Finally, we set a very specific type of limit:
* Use a 75% limit and a 75% stop.
At the end of each day, the back-tester checks to see if the long call is up 75% or down 75%. If it is, it closes the position.
RESULTS FROM THE OPTION BACKTESTER
Here are the results over the last five-years in Amazon. You can see the exact set-up to replicate it in Trade Machine by tapping this link.| AMZN: Short 40 / 20 Delta Put Spread | |||
| % Wins: | 77.8% | ||
| Wins: 28 | Losses: 8 | ||
| % Return: | 788% | ||
Tap Here to See the Back-test
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).
Checking the Moving Average
You can check moving averages for AMZN on the Pivot Points tab on www.CMLviz.com.Back-testing More Time Periods in Amazon
Now we can look at the last six-months:| AMZN: Short 40 / 20 Delta Put Spread | |||
| % Wins: | 75% | ||
| Wins: 3 | Losses: 1 | ||
| % Return: | 41.1% | ||
Tap Here to See the Back-test
For completeness, we can also look at the last two-years:
| AMZN: Short 40 / 20 Delta Put Spread | |||
| % Wins: | 78.6% | ||
| Wins: 11 | Losses: 3 | ||
| % Return: | 213% | ||
Tap Here to See the Back-test
And, while we're at it, here is how this same technical trigger did when applied to getting long weekly call options as opposed to selling weekly put spreads over the last two-years:
| AMZN: Long 40 Delta Call | |||
| % Wins: | 50% | ||
| Wins: 8 | Losses: 8 | ||
| % Return: | -16.5% | ||
Tap Here to See the Back-test
We see a negative return with getting long calls and a lower win rate as opposed to a 213% return and a 79% win rate being less aggressive. Sometimes "not bearish" is appropriate.
WHAT HAPPENED: Option Backtester
Be empirical and methodical. Stop guessing. Tap here to try it yourselfRisk Disclosure
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.