Online Stock Trading Software

Back-Tested Picks of the Day: Only the best 2 or 3 Trades Matching our Winning Criteria


Just about 20 years ago I created the patented PowerOptions tools to trade my personal account after I retired from HP. At the time I wanted a better way to search across the universe of options based on my stock AND option criteria in a given strategy… I wanted a one-stop tool to simultaneously search though stock technicals, stock fundamentals, market sentiment and option data… something that was not available in 1997.

The PowerOptions tools became a huge time saver – rather than pouring through articles and stock reports to find stocks that matched my sentiment, then pouring over options chains to find a combination that matched my goals, all of this was now accomplished with a few clicks.

Over that tenure, the stock and options markets have seen many changes:

  • New trade ideas are touted with the promise of unrealistic returns
  • New securities pop up, ETFs, ETNs, Binaries …
  • Quarterly options, weekly options. (who remembers the FRO’s?)

As the market changes, opportunities change and so do our needs – the needs of successful self-directed traders are always changing as well.

With that in mind, PowerOptions started collecting historical data more than 10 years ago and we have been offering our members access to historical search tools using our patented technology, historical options chains and more. Having a suite of tools to create your own search of the market is a great time saver, but without back testing those criteria, an investor may lack confidence in the past performance and potential future results.  Also let’s face it, paper trading is just not practical to test your strategy.  It would take years to experience different bull and bear markets to gather results that had any statistical significance by paper trading.

A more effective use of Historical Data:

As great as our historical back-testing tools are, there were limitations.  Sure we had data that went back 10 years and could apply a strategy back in time, but the process was very time consuming.  Many investors’ just do not have the time to conduct the testing.  It would take weeks and months with thousands of iterations to conduct a back test.  As essential as back-testing is in developing an investment plan, it needed to be faster.  The PowerOptions programmers responded by automating the process of applying the search criteria over and over again through time.  This reduced the time in applying the same strategy over different time periods, but there still remained a critical problem.  What parameters are most important?  What value should be used for each parameter?  What exit strategies should be considered?  These questions and many others could not be easily automated.  The ability and expertise to allocate funds, apply exit strategies, and chose parameters had to come from ME with my 40 years of investing experience.

To solve the time and expertise problem for our subscribers, a couple of years ago I began offering my personal services to help subscribers improve their search criteria and trading plans. These services are offered as “Strategy Testing” for $50 and “Strategy Optimization” for $500 on our store and you can purchase them anytime. With the “Optimization” service, I guarantee to improve the results of a subscribers’ search parameters by 20% or more. If I can’t make this 20% improvement happen, I’ll refund the fee. So far, this has NEVER happened. I have always been able to improve the results substantially! To be fair, I’ve only had a few subscribers even take me up on the offer. For the subscribers who I’ve helped, in every case, the improved performance paid for itself in less than a year – sometimes only a few months.

This year I decided to use these testing and improvement skills one step further to enhance the default searches and themed searches that we offer on PowerOptions. These pre-set searches were designed to be a stepping stone for investors to create their own parameters. But over the years, through thousands of phone calls and emails, I found that many users were reluctant to adjust the criteria to match their needs or they would simply trade the results of a programmed search.  Only a few subscribers used the historical tools to improve their investment results.

Since I was always able to improve the return results for myself and subscribers, it seemed logical to use my skills with back-testing to improve the results of the default screens supplied on the PowerOptions site. The result of this testing is the new “Picks of the Day” and “Weekly Picks of the Day” available for Covered Calls and Naked Put trades (with other strategies coming soon!).

Process and Results

As a starting point I took our monthly Covered Call and Naked Put screens (Initial Values) and our Weekly default screens in those strategies. For the Naked Put monthly search the criteria focused on stocks in an up-trend with sound fundamentals, as well as options parameters such as implied volatility, % OTM range and premium / yield. I tested these criteria over a time frame of May 2015 to May 2016 where the SPX was essentially flat.

The SPX results were flat over the back-tested time period.

My initial screening parameters resulted in a 6% return… which is a reasonable performance for a Naked Put strategy considering a flat market with 2 very sharp corrections during the test period. But, I knew these results could be improved.

I then began tinkering and tweaking the criteria over a wider range to improve the bench mark return. I made hundreds of runs with dozens of different settings to improve the results. After a few weeks of testing the initial 6% return was improved to over 30%! You always think or hear people comment on a trading idea ‘Would this outperform just buying the SPX or NDX?’ Oh yes, yes it did.

Now there are many skeptics that question the value of back testing, and rightfully so. Actions of the past cannot be used to predict the future. Many back tested results might be shown over a pre-selected time frame where market conditions favored that strategy, or where search parameters were fine tuned to maximize results based on one or two key trades that dominate returns. This is not true for my back test results.

These results come from the 24 monthly Naked Put trades that matched the criteria over the 12 month period. Trade allocation was set for each search so that only two or three trades would be entered at a time, essentially what a real self-directed investor would trade in their account. The average gain on winners was 4%, with the average loss at -4%, and a success rate of 85%. I did not cherry pick trades, I simply plugged in the criteria and let the program run for an hour or so and then evaluated the end results.

Lessons Learned

It always amazes me when running these historical tests what ends up improving the results, what hurts the results and what has no effect. Traders with years of experience, like myself, often think they know the right answer to optimize a trade, but do they?  As an example, many naked put Gurus and advisers advocate exiting the trade a naked put trade if the short put goes In-the-Money (ITM). But all of my back testing results indicate that an exit of the trade when the put goes ITM is premature and results in lower returns.

It appears that the positions are volatile enough to fluctuate in and out of the money. Liquidating the put positions when they go ITM has been tested over hundreds of positions and on average resulted in a loss when a profit would have been possible with a little more patience. I have found an exit based on price change for the underlying stock to be much more effective for controlling losses. Such a finding was not intuitively obvious for me either! I had to back test and learn it through many trading cycles.

Some historical tests benefited from avoiding stocks that had earnings announcements prior to expiration, where other results were hurt by avoiding those securities. The end result of these lessons are the tested and proven Picks of the Day screens available only on PowerOptions.

How does this Benefit You?

My goal has always been to offer a set of tools that not only met my options investing needs, but a service where just about any options investor can create a search that matches their stock and option requirements. A ‘One Stop Shop’ for options investors. I’ve always offered pre-set searches as a starting point for options traders, but I knew I could improve these criteria and make the entire process faster… and more profitable.  The Picks of the day brings back tested criteria available to all subscribers.

So, how does this new feature benefit PowerOptions subscribers?

Speed – One click and you can see the Picks of the Day or Weekly Picks of the Day for these strategies.

Confidence – I have put in the effort to maximize the returns over different market conditions. I would not add this valued feature to the website unless I personally had the confidence in these results over time. And yes, I do trade these positions in my account.

Transparency – Most advisory services and trade publishers keep their selection processes confidential. This makes you a captive audience if they produce winning trades… but you get very few answers if a string of losers occurs. I want to provide you a service with full disclosure and transparency to enable your success earlier and provide you a stepping stone to improved results even further than I’ve been able to create. My mission is to provide you with the tools and knowledge to successfully “fish” for yourselves, rather than just selling you the “fish” I’ve “caught”. I show all of the parameters for each Pick of the Day screen… and you can still adjust those to suit your needs.

Realistic – The Picks of the Day only show the top 2 or 3 results that match the tested criteria. You may see 20 results alone on the first page of a PowerOptions default search…but are you generally entering 5, 10, 20 or more trades per month or per week? Perhaps you are, but for the majority of self-directed investors we open 2-3 trades at a time. Investors of all experience levels and account sizes can benefit from the Picks of the Day – whether these are the only trades in your account or if they represent only a small portion of your options investments.

If you did not make your investment goals last year, or were promised 50%+ annual returns from a guru and did not see anywhere near those promised returns, check out the Picks of The Day screens and see how they perform for you. Take advantage of my market experience and hours of back testing, and see the trades that I’m using myself.

If you’re a PowerOptions subscriber, just logon to see the new trading ideas… Click here to get logged in. Note: These picks of the day trades are not available if you are an End Of Day subscriber… you will have to upgrade to delayed or higher service level to access picks of the day.

If you don’t have an active trial account or subscriber account… Click here to get a free trial.

Click this image if you need to see it in full-size

Once you logon, just click or hover your mouse over the COVERED CALLS tab and you will see two new sub-tabs that say, “Picks of the Day” & “Wkly Picks of the Day” – the same is true for the NAKED PUTS tab.

If you are already logged into, here are some direct links to see the pick of the day…

Covered Call Picks of the Day – Regular Expiration
Covered Call Picks of the Day – Weekly Expiration
Naked/Cash Secured Puts Picks of the Day – Regular Expiration
Naked/Cash Secured Puts Picks of the Day – Weekly Expiration

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  1. Pingback: Free Options Resources on PowerOptions | PowerOptions Web Log

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