In a previous article, “Stocks – Options & Trading Probability“, we discussed probability and stock options. PowerOptions‘ stock options search tool SmartSearchXL and stock options back testing tool SmartHistoryXL both display probability estimates for stock options positions and provide the capability to search based on probability criteria.
We were curious to know how well our probability estimates compared to real life stock options trading. Using PowerOptions new option back testing tool SmartHistoryXL, we performed iron condor back tests for all indexes, ETF’s and HLDR’s over a four-month period. Iron Condor positions were selected the Monday following options expiration with all stock options expiring on the next month’s stock options expiration day for the timeframe of May 2006 to September 2006.
The results are shown below:
| Iron Condor Index – Back Test Results | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Timeframe | 70-80% | 80-90% | 90-100% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| May06-Jun06 | 100% | 100% | 100% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Jun06-Jul06 | 92% | 96% | 100% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Jul06-Aug06 | 66% | 82% | 100% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Aug06-Sep06 | 72% | 90% | 100% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ——– | ——– | ——– | ——– | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Average | 83% | 92% | 100% | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Analysis
The predicted and actual results tracked very well. For example, iron condor positions were selected for a search with probabilities of success between 70% and 80% in the Aug06-Sep06 time frame and 72% of the positions were successful, very close to the expected success rate of 75%. The Jul06-Aug06 timeframe with 70-80% probabilities was the only one case where the actual results were significantly worse than the predicted results with a success rate of 66% and a predicted success rate of 75%. Overall, the average actual success rate outperformed the predicted success rate over the four-month period with average actual success rates of 83%, 92% and 100%.
Two surprising results of the analysis were:
- All of the iron condor positions in the May06-Jun06 timeframe were successful.
- All of the positions with a predicted probability of success in the 90-100% range were always successful.
In a future article we will analyze the probability issue more closely and tackle whether PowerOptions probability estimates are statistically significant.
PowerOptions provides a free 14-day trial of its service. So join PowerOptions today, and you too can start reaping the benefits of PowerOptions highly accurate probability estimates for selecting stock options positions.
PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a stock options investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing stock options positions.
[tags]options trading, stock options, option probability, iron condor, option back testing[/tags]