If you are wondering how to select the best option when backtesting (or scanning) given your parameters, then this is the article for you.
ORATS uses a sophisticated scoring system to choose the best option based on the parameters. We measure how far each option is away from the ideal as a proportion of the range of the minimum and maximum. We score each parameter based on how far the actual is from the ideal divided by the range of the min and max.
We choose the option has the least difference from the ideal, the lowest score.
The score is calculated as:
difference = actual option reading - ideal criteria input
range = Max criteria input - Min criteria input
score = sum of all ideal's(abs(difference)/range)
For example, let's say you have three parameters, days to expiration, delta, and spread yield used to identify the options you want. You have entered the following Ideal, Min and Maxes for the parameters.:
criteria Ideal Min Max
DTE 20 15 25
delta .2 .15 .25
spYield -.02 -.01 -.03
Here are two options that match your parameters and how we choose the best:
option1 DTE 17, delta .17, spYield -.017
DTE = 3/10 = .3
delta = .03/.1 = .3
spYield = .003/.02 = .15
score (sum) = .75
option2 DTE 22, delta .22, spYield -.29
DTE = 2/10 = .2
delta = .02/.1 = .2
spYield = .009/.02 = .45
score (sum) = .85
Since the score of the first is less then choose option1.
You might like this article next: How To Calculate Backtest Returns
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