Backtesting
Tuesday, March 23rd 2021
Testing The Covered Combo Options Strategy
Backtest the covered combo by selecting a short straddle and add a long stock position.
Summary
The covered combo options strategy involves shorting an out of the money call and put while going long on the stock. The ORATS backtester can be used to set up the strategy by selecting a short straddle and adding a long stock position. The default covered combo with 30 days to expiration and 30 delta short strangle + long stock has an average annual return of 13.01% and Sharpe of 0.66, outperforming long stock alone. However, it also adds additional risk and volatility, leading to a lower Sharpe.
The covered combo options strategy is short an out of the money call, short an out of the money put, and going long the stock. You can also think of it as a covered call with a short put. Also, it's a short straddle with long stock.
- To set up the strategy in the ORATS backtester, start by selecting a short straddle from the neutral options strategies offered.
- From the additional parameters, select Stock Position Edit
- Select Type = Married and Ratio = 1
Note that Overlay would carry a stock position for the entire date range whereas Married only carries stock when there is an options trade on.
The results of the default covered combo with 30 days to expiration and 30 delta short strangle + long stock is an average annual return of 13.01% and Sharpe of 0.66
By way of comparison, long stock only returned 11.13% and had a Sharpe of 0.74 since 2007.
A short straddle alone had a return of 4.31% in notional terms (stock price as the divisor not margin as the divisor) and a Sharpe of 0.49.
Other combinations of days and deltas were tested as below.
The assessment of the covered combo is that it adds to returns but sacrifices with additional risk and volatility, leading to a lower Sharpe.
Disclaimer:
The opinions and ideas presented herein are for informational and educational purposes only and should not be construed to represent trading or investment advice tailored to your investment objectives. You should not rely solely on any content herein and we strongly encourage you to discuss any trades or investments with your broker or investment adviser, prior to execution. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. Option trading and investing involves risk and is not suitable for all investors.
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