The Skinny On Options Data Science

Backtesting Active vs. Passive

| Aug 18, 2016
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    The Skinny On Options Data Science

    Backtesting Active vs. Passive

    Aug 18, 2016

    Conventional wisdom says that passive investing beats active investing. We strongly disagree. We believe you should take control of your investing. Data Science uses visualization tools to make complex concepts and data more easily understood. The head of our research team, Michael Rechenthin has a Ph.D. in Data Science joins the guys to backtest and compare the passive approach to three different active approaches using options. Which do you think will be better? Which strategy has the most risk?

    The passive approach was long the S&P 500 and reinvesting the dividends. That’s exactly what an index mutual fund does and what the so-called experts claim is the best approach. We also studied three different simple active approaches. Two approaches were based upon a Covered Call strategy. One strategy sold the at-the-money (ATM) Calls in the SPX and the other sold the Calls with a 30 Delta. The third active approach was shorting Puts using the ATM Strike in the SPX.

    Our study of the SPX used data from 2000 to the present. A results table included the average yearly return, median yearly return, Standard Deviation of yearly returns and percentage of weeks profitable. The passive approach was consistently at the bottom. The returns generated were lower than two of the active approaches while also having a higher Standard Deviation (SD) of the yearly returns (demonstrating greater risk) than those two active approaches. The passive approach also saw the largest drawdowns. An important observation was made that Implied Volatility (IV) was greater than realized volatility on 82% of the days on the study. A graph of the yearly maximum drawdowns showed that being long the S&P 500 had the worst drawdowns, while the Covered ATM Call and the short ATM Put strategies "had the best bang for your buck, with a third less volatility of returns." This proves that an option strategy is actually safer than long outright positions.

    Watch this segment of The Skinny On Options Data Science with Tom Sosnoff, Tony Battista and Dr. Data aka Mike Rechenthin Ph.D., for the valuable takeaways and the results of Mike’s backtesting the passive approach to three different active (but simple) approaches using options.

    This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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