Backtesting of the ATM Option Strategy – LC & LP at the same time on the active US stocks

 

Backtesting of the ATM Option Strategy –

LC & LP at the same time on the active US stocks

7 Dec 2020                                                                by Queenie Wu

 

Rules:

Market capitalization must be bigger than 1 billion USD

Volatile, active US stock

Check the price range of the stocks in the past 3 months

Price range x 1/3 is the range of the options

 

 

Assume we are now at 9 September 2020

Example:

Let’s try

General Electric stock price  = $6.11

Average price range of GE in the past 3 months: $1 to $2

Market K = 65.3 billion

 Tradingview daily price chart of GE

 

On 9 Sept 2020, the stock price $6.11 is close to the floor of the BB, I would like to try LC and LP the options with strike price of $1 higher / lower than the current stock price $6.11.

Among the strike prices of $8, $7, $6, $5, $4, $3…… I picked $5 and $7, which are $1 away from the current stock price. The 1/3 rule cannot be applied in this case.

Expiration 3 months later: 18 Dec 2020

LC GE $7 at the premium of $0.36

LP GE $5 at the premium of $0.3

 

TD Ameritrade Thinkorswim backtesting

 

Case 1: on 17 Sept 2020, the stock price increased to $7.09 which is close to the ceiling of the BB,

LC GE $7 at the premium of $0.78

LP GE $5 at the premium of $0.13

 

Net profit:

(0.78 – 0.36) x 100 + (0.13 – 0.3) x 100 = 42 – 17 = $25 per pair

 

Conclusion

In this case, if the stock price moves in either direction, the LP and LC of option strategy wins.

 

Case 2, on 14 Sept 2020, the stock price decreased to $6.09 which did not move much,

LC GE $7 at the premium of $0.35

LP GE $5 at the premium of $0.27

 

Net loss:

(0.35 – 0.36) x 100 + (0.27 – 0.3) x 100 = -1 – 3 = -$4 per pair

 

Conclusion

If the stock price does not move much, the above strategy fails.