Strangling, forecasting the required win rate

Before I get to the backtesting results I figured I should check what might be needed for a win rate in order to produce a profitable plan. If I assume that I use a stock/ETF option produces at least a 10 cent credit each week I was going to setup a spreadsheet to forecast this over a period of time, a few years anyway, but decided that if I applied a very basic ratio of loss allowance against the expectation of profits it is very simple to calculate.

I figured if a 10 cent credit trade provides a $100 profit (10 contracts per side of the strangle, ignoring commissions at this point as they are only worth about 2 cents of the trade and I figure that 10 should be a low enough expectation to accommodate that).

Given the nature of a strangle, limited gain for larger possible loss, I used 4:1 loss over gain on a per trade basis. The 10 cent trade could loose 40 cents (which is actually a 50 cent move but the 10 cent credit gets applied against the loss) or a losing trade would be $400 for a winning expectation of $100.

Given this simple math I would need to see 4 trades to cover the one loss which is actually an 80% win rate just to break even. That's tough in the world of trading in the normal sense of buying and selling based on charts, fundamentals or news.

Keeping this in mind I will run the numbers for trading based on SPY (any index ETF would suffice to see the trend over time). After applying the range of 4% from open to close of the trading period I decided that I should also allow this range to be variable to see how much of a difference it might make on the win rate.

I also noted that I had been using the numbers based on Friday's closing price. there are only a small handful of options that expire in the evening of Friday, most expire based on the opening price on Friday morning. this is calculated based on the first moments of the market so I also need to adjust my spreadsheet test to accommodate this as well. Doing so makes the results more accurate as Friday can move quite a bit from open to close.

Win rates over time coming up.

Jeff.