Backtesting
Saturday, May 30th 2020
Backtest Basics: Trading On A Specific Day Of The Week
Controlling a backtest to trade on a day of the week, like every Monday and exit every Thursday can be done by setting days to expiration and hold days.
Summary
This document explains how to control a backtest to trade on a specific day of the week, such as Fridays, by setting days to expiration and hold days. The backtester can also be set to exit using hold days or days to expiration. The document includes examples and images to illustrate these strategies and explains how changes in expiration dates for options can affect backtesting results.
You can set up the backtester to trade only on a certain day of the week. Say you only wanted to trade on Fridays. You would set up the days to expiration min max and ideal all at 8. We count the day of expiration as one day to expiration which is why it is 8 rather than 7: For the options valuation formula, you need time to expiration to be greater than zero for the values to calculate on the Friday of expiration.
You can also control when the backtester exits either by using the Hold Days or exiting with Days to Expiration.
Here's how it looks in the backtester:
This produces an odd looking monthly returns and trades below. Notice there are 4 trades per year before 2010-06-04. These were quarterly options expiring on Saturday.
The results are further confused by expirations changing to Friday from Saturday around by weekly options being added around June 04, 2010 (see below). At this time ORATS changed the expiration to Friday for all monthlies and weeklies.
So before June 04, 2010, you need to have 9 days to trade on Fridays and after that date you need 8 days, 9 will trade on Thursday.
You can combine these two strategies to make a backtest consistent back to 2007. You would make the Date Range for the 9 day test only to 6/01/2010 and combine that with the 8 day test.
For exiting, choose Hold Days of say 3 to exit after three calendar days pass:
You can use Days to Expiration for example use 2 to exit the day before expiration:
Here you would exit the day before expiration:
Yes, it is a bit complicated but using these features, you can control the day of the week to enter an exit trades.
From the OIC website.
Disclaimer:
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Be sure to read the OCCs Characteristics and Risks of Standardized Options to learn more about options trading.
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