Weekly Naked Put Picks of the Day Back-Testing Analysis...
There are about 450 stocks that offer weekly options. Many investors prefer the shorter time frame and the potentially higher returns in the use of weekly Naked Puts. The use of weekly options could affect the value of the selection parameters and would need to be tested as we did with the monthly naked put picks of the day. In general, parameters like the amount OTM, option premium, and stop loss criteria could all be affected by the shorter time frame in the use of weeklies.
Testing goals, process, and rules for the weekly naked puts:
My objective with using weeklies was to increase the returns and to have less time exposure with each trade compared to the use of monthly selections. I expected each trade to be terminated at the end of the week. If the put was OTM it would expire worthless, but if ITM, it would be covered (bought back) before the close on Friday.
After many test iterations we found selections were best if puts were, 2% OTM for the put strike price, stock price was in an uptrend based on the 20 SMA, none of the positions had earnings due during the week, no special stock list was used, and each position had a stock price loss limit of 7% at the close. These conditions were very different from the criteria used for the monthly naked puts.
The SPX net change over the year from 5/15/2015 to 5/21/2016 was flat.
Testing Period and Market Conditions for the back testing:
The back-testing period was the last year from 5/15/2015 to 5/21/2016 (53 weeks). This is the same period used for testing the monthly naked put selections. There were several sharp declines over this period of time and then commensurate recoveries. Because of these decline/recovery periods, I feel that this testing period is a good representation of the general market condition and an appropriate period to use for a long-term strategy test. The net change of the year was flat for the SPX. As one might expect with naked puts, when the market was up the returns were great and when the market declined there were losses.
The Monday at 3PM scan results were used each week.
Testing was done with the closing prices on Monday, but orders need to be put in before the close between 3-4 PM.
There were 106 trades over the 53 week period.
Positions were open for 4 days. (sometimes 3 days if Monday was a holiday)
Equal dollar amounts were invested in each of the top 2 positons, half of the capital invested in each position per week.
$100,000 was the base cash amount at the start of the test period.
On average over the 53 week test period the return was 47% ($147,000 ending balance)
There were 25 losses averaging -3.5% and 76% winners averaging +2.1%
15% of all trades resulted in the stock stop loss of 7%. I found that the stock price loss limit held down losses and substantially improved returns.
The largest drawn down on a weekly basis happened when both puts hit the 7% stock loss.
Notes... These naked puts may be more speculative than many investors would use because of the high IV's allowed. Trading results based on back-testing doesn't mean that the same results will happen in the future. These results are based on exiting the position if the stock drops 7%. Intuitively having a stop loss if the put went ITM seemed a prudent tactic. However, in every test case, using a stop loss if the put went ITM, exited the position prematurely, substantially reduced the returns, and increased the number of losses for the test positions.
Picks of the Day for Weekly Naked Puts - Sample Weekly Naked Put Trades - Trades Based on Back-testing