High Win Rate Trigger in Microsoft (MSFT)
High Win Rate Trigger in Microsoft (MSFT)
Date Published: 2019-09-02
Disclaimer
The results here are provided for general informational purposes from the CMLviz Trade Machine Stock Option Backtester as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.Lede
In today's dossier we focus less on return and more on win rates and string together multiple wins in a row. That means we need to use spreads, and a bearish tilt but still a strategy that shows a win if a surprise rally comes along as well.Preface
Some may balk at the idea of a multi-legged option strategies -- too complex, too many trades, not my style. It isn't any of those things -- and in MSFT , there's only so long the results can be ignored when the market hits a volatility zone -- or when it doesn't.You are either flexible to new trade analytics to find historically winning patterns through difficult market periods, or you are not. That's it.
Building the Strategy Before We See the Results
We constructed a multi-leg option trading strategy. It has a bearish tilt, but it does turn a profit in a bull market as well.Here is the image of the strategy created in Trade Machine's custom strategy builder.
As usual, rather than take this is one big trade, we can actually break it into two familiar trades. This could be one way to apply this lesson in real life. That is, open 2 put spreads.
Rules
The first leg is simply long one put spread:* Long one 37/20 delta monthly put spread.
The second leg is simply short two put spreads:
* Short two 30/10 delta monthly put spreads.
This is short two put spreads
What Does This Mean?
This is casually called a ratio put spread, and specifically this is a 1 x 2 x 1 x 2 (read out loud as "1 by 2 by 1 by 2") put spread.The idea is to create an option position that:
* Creates a credit at onset.
* Has no upside risk (a stock rise to any price should be profitable).
* Has some downside bias (if the stock goes down it profits at the maximum level)
* Has a hard limit on total downside.
Broadly speaking, this is how all of that looks in a profit and loss chart at expiration:
This strategy is profitable in the green shaded area, and shows a loss in the red shaded area.
To get your bearings:
* The maximum loss starts at the lowest strike price. Any stock price there or lower shows a capped loss at its maximum.
* The maximum gain occurred right at the second-strike price (the first short strike price), which is below the initial stock price at onset of the trade.
This strategy does well in a bull market but does best in a bear market. It does worst when there is a very large stock drop, but that loss is capped.
Addressing a Problem
As we can see from the PnL chart, while this trade does have limited risk, a big bearish move is going to be a loser. So, we need to add a condition using technical analysis that attempts to avoid the trade when the market is either in a down trend, or appears over bought and may soon turn into a down trend.We accomplish both goals with two simple rules:
The trade opens if and only if the stock price is above the 50-day simple moving average.
The trade always avoids earnings by using the "Never Trade Earnings" setting in Trade Machine. This means that any open trade would close two days before earnings, and no trade can open until at least two days after earnings.
Exit Filters
The trade as backtested simply closes at expiration of all of the options. That's it.5-years: Microsoft Option Backtester Results With Technical Analysis
Here are the results of this strategy over the last ten-years.| MSFT: Short Ratio Spread | |||
| % Wins: | 80.7% | ||
| Wins: 46 | Losses: 11 | ||
| % Return: | 586% | ||
Tap Here to See the Back-test
The mechanics of the TradeMachine® stock option backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
Microsoft Option Backtester Results With Technical Analysis
Here are the results over the last year in MSFT:| MSFT: Short Ratio Spread | |||
| % Wins: | 76.9% | ||
| Wins: 10 | Losses: 3 | ||
| % Return: | 139% | ||
Tap Here to See the Back-test
The mechanics of the TradeMachine® stock option backtester are that it uses end of day prices for every back-test entry and exit (every trigger).
Example Backtest
With MSFT stock above the 50-day SMA on Aug 29th, this backtest would have opened with the following trade:
To break it down as it we did prior, it would look like this:
The first leg is simply long one put spread:
* Long one 37/20 delta monthly put spread. The closest deltas for MSFT were 38.6 and 19.2:
That's paying $2.53 - $1.13 = $1.40 for the Sep27 136/130 put spread.
The second leg is simply short two put spreads:
* Short two 30/10 delta monthly put spreads.
The closest deltas for MSFT are the 30.9 and 10.3 deltas.
That's receiving (credit) 2*($1.94 - $0.58) = 2*(1.36) = $2.72 for selling two of the Sep27 134/125 put spreads.
The total credit for this entire position is -$1.40 + $2.72 = $1.32.
The PnL chart at expiration for this trade is:
That's it...
Checking the Moving Average
You can check to see the moment a stock dips below the 200-day MA for MSFT on the Pivot Points tab on www.CMLviz.com.Next Steps
Find high win rates here. Be rigorous. You deserve it.Risk Disclosure
Past performance is not an indication of future results.
Trading futures and options involves the risk of loss. Please consider carefully whether futures or options are appropriate to your financial situation. Only risk capital should be used when trading futures or options. Investors could lose more than their initial investment.
Past results are not necessarily indicative of future results. The risk of loss in trading can be substantial, carefully consider the inherent risks of such an investment in light of your financial condition.
Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.
You should read the Characteristics and Risks of Standardized Options.