Welcome to this blog post where we will delve into the back testing of the Balanced Calendar Spread strategy. This strategy has gained significant attention due to its profitability potential. By thoroughly examining the results of back testing, we can determine whether this strategy holds true to its claims. If the results are favorable, implementing this strategy with a smaller capital investment becomes a viable option. This blog aims to guide you through the process of back testing and shed light on the adjustments that can be made if the strategy falls short of expectations. Take notes as we explore this topic, and if you find value in this blog, please share it with others.
Proper order management is vital, and many traders tend to overlook this aspect. Therefore, I urge you to maintain a trading journal and diligently note down the specifics of your trades. I encourage you to try this strategy for at least a year under my guidance. The ultimate question remains: Is the Balanced Calendar Spread strategy truly profitable? To find the answer, we need to conduct a meticulous back testing process.
Back testing involves analyzing historical data to simulate trades and evaluate their performance. By applying this technique to the Balanced Calendar Spread strategy, we can gain insights into its profitability.
During our extensive back testing, we observed that out of 10 trades, 8 proved successful. However, I want you to experience some failure as well. It is through learning from these failures that we grow as traders. Even if you can achieve a successful outcome once out of your attempts, you will attain a favorable ratio of 10 out of 9.
Even a modest gain of 1% or 1.5% per trade can accumulate to significant profits over time. In the event that the Balanced Calendar Spread strategy falls short of expectations, we have not abandoned you. Adjustments play a crucial role in adapting the strategy to different market conditions and mitigating potential losses. In this blog, we will discuss various adjustment techniques that can help you navigate through challenging situations and enhance your overall trading performance.
We’ll use a 1-hour chart of the Nifty index; our objective is to identify the range within which our strategy operates. By determining the upper and lower ends of this range, we can evaluate potential breakout or breakdown areas that will guide our adjustment decisions.
To facilitate our back testing, we will utilize the Opstra simulator. This simulator allows us to simulate trades and evaluate their performance based on historical data. For this demonstration, let’s select a specific date for back testing purposes. For instance on June 6th, we will initiate a regular trade and assess its outcomes.
Since we are conducting back testing, we need to select a previous date to simulate our trade. Let’s choose May 25th as the selling expiry date. This means we will sell the options expiring on May 25th, and our analysis will be based on weekly expires. Referring back to the previous expiry, say on May 18th, we can proceed with our simulation.
Now that we have defined our trade start date, we can use the Opstra simulator to perform the trade and analyze potential adjustments. By simulating the trade based on historical data, we can evaluate the performance of the strategy under various market conditions.
In the above example on May 15, we decided to place a trade that would expire on May 25. However, instead of selling on May 18, we wanted to sell by the end of the week. Therefore, the selling date would be May 25. We started by focusing on the selling aspect.
At 11:30, we initiated the selling process. We aimed to sell at around Rs. 25. We found a put option with a strike price of Rs. 18,000, and we sold it. The quantity sold was around 36 lots, which is our typical freeze quantity.
Moving on, we have to the call options. Let’s say we sold call options with a price range of Rs. 25-26. This created a normal strangles strategy, as explained in our previous blog. The selling prices were approximately Rs. 93 and Rs. 87, respectively. The range for this strategy remained the same.
By selling these options, we expected to generate around Rs. 1 lakh. The range of the strategy was around 750 points, equivalent to approximately Rs. 18,750.
Next, we decided to change the expiry date to June 1. Simultaneously, we bought call and put options with a strike price of Rs. 25-25. The buying prices were around Rs. 37 each. This resulted in a small debit because the buying prices exceeded the selling prices. The debit was around Rs. 17, slightly higher than the previous blog’s Rs. 12.
In summary, we executed a strangle strategy on May 15, with an expiry date of May 25. We sold put and call options to generate profits. We later adjusted the expiry date to June 1 and bought call and put options to hedge our position. Although a small debit was incurred, the strategy remained intact.
In this trade scenario, we had a specific adjustment plan in mind. At 3 o’clock, we would assess the situation and make adjustments if there was a loss on the upper side. However, based on the chart analysis, it was evident that the market was moving downwards. Therefore, adjustments would be made if the market continued to decline.
Upon reviewing the chart, it was observed that the market broke down at 1 o’clock on the 16th. To demonstrate the adjustment, we moved forward to this date, specifically around 1:50. At this point, the profit and loss (P&L) was approximately 5400. The blue line had surpassed the red line, which indicated an increase in implied volatility (IV).
Understanding the concept of IV and volatility, it should be noted that increased volatility can lead to profits even if it was not initially intended. The debit incurred in the calendar strategy was contributing to the profit due to the higher IV.
You can also consider trading strategy that involves closing trades on Wednesdays at 3 pm by extending the duration of a trade to see how it develops. There is no loss on both sides and a possibility of closing the trade in profit through taking the trade at 3:15 pm on the 25th, we anticipate a 2% return based on margin requirements.
Emphasizing the importance of booking profits, sometimes you aim for 2% gains in bi-weekly trades and 4-5% gains in monthly trades. I suggest enjoying the days between trades (Friday, Saturday, and Sunday) and not feeling obligated to trade every day. By following this strategy, you claim to have achieved an average success rate of 8 out of 10 trades, resulting in a monthly return of 4-4.5% or around 55-55 on an annual basis. Additionally, you mention the possibility of booking higher profits of 3%-3.5% in some instances.
So, if you have seen its average or what we were doing till now I have done it for 2-2.5 years in a row. Many people have followed it and they have sent me a report in PNL, it is almost around 53% in 2 years in a row which means there is something in it. So, I would like you to practice it properly in a bi-weekly for a year at least and see, if you are around 50 or 40, you are in front of lakhs of people you will be almost in the top 1% trader as you are able to beat the index, it means you are already above 1%. So, you just have to be patient and this patience means, you will feel that I will do the adjustment but you have to see in all 3 formats. Do you have any problem at 3 o’clock? If the market opens 300 point gap-up-gap-down tomorrow then you don’t have any problem and if there is no drastic break-out or break-down in the price it means that something was sideways for 15 days.