Those Who Do Not Learn From History are Doomed to Repeat It

Historical search capability is an important companion to selecting your own search criteria for investments. Many investors use paper trading (simulated trading without money) as a means to test their investment rules or screening criteria. But paper trading is very time consuming. And it is difficult to test over a variety of market swings. It may take months for a set of criteria to be tested. Many Brokers encourage paper trading, but few of them have the historical testing capability when options are used in the trade.

However, using PowerOptions’ historical testing, a strategy (23 different strategies) and search criteria can be tested in hours and results can be averaged over several stock selections. Historical data for both stocks and their options is available back to 2006. This period of time has up, down, and neutral markets to enable testing during a variety of market conditions. Testing with historical data is much more efficient than the use of paper trading. A user defined set of criteria for a strategy like covered calls can be tested over several market types in less than an hour.

As an example, using PowerOptions historical testing tool and selecting to back-test a covered call search performed on February 21, 2012, the Monday following February option expiration with parameters set to search for profitable companies (P/E > 0), companies with a stock price in an up trend (sma100 > sma200), stock price near the lower Bollinger band (%BB (20) < 20), options expiration for the following month (March) and sorting by % If Unchanged from Highest-to-Lowest revealed the following results:

The % If Unchanged parameter corresponds to the potential return a covered call will realize at options expiration if the price of the stock is unchanged from initial entry. Searching for companies near the lower Bollinger band returns companies that have recently had a pull back in stock price. Screenshots of the parameters used for the historical covered call search are shown below:

Performing the results for the covered call positions yielded the actual results as shown below:

As shown, every position was profitable with an average return of 3.7% which lagged slightly behind the return of a long position in QQQQ at 4.4% and was ahead of the return for the SPX which came in at 3% with the same holding time of 2/21/2012 to 3/16/2012. For the covered call positions, the holding time for realizing the average return of 3.7% was 25 days and represented an annualized return of 54%.