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How to back test Option Trading Strategy for free
  • February 9, 2022
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  • 13

Ten years before when I wanted to backtest a simple trading system, I need to write tons of code with charting tools like Amibroker. Another problem is getting the historical data, cleaning the data and back testing the logic with multiple parameters, all these would consume more time and effort. Now thanks to the rise in no code platforms where back testing has been made very easy with a click of a button.

In this article, we will see how to back test a option trading strategy without any cost using a platform called https://algotest.in The design is almost exactly same as well know platform called www.stockmock.in where you can back test index option with nominal fee. 

I have tried to backtest the famous 920 short straddle strategy using this free tool algotest.in

Rules:

Short ATM Call and Put at 9:20 AM

Stop loss 25%

When stop loss is hit, squareoff the individual leg. If SL not hit, close the position by EOD.

You can make your own rules by adding trailing stop loss, re-entry, moving Stop loss to cost, exiting based on fixed profit or fixed loss etc. Many such multiple parameters are available.

Here’s the backtest results for the above strategy

All important metrics, day wise returns and option to download the result in excel file is available.

You can even back test strategy using stop loss based on underlying index movement. The 1% Short straddle bot which is designed to make profits on range bound markets without using any fixed stop loss into the system, if Bank Nifty moves +1% or -1% from 9:30 AM, then we simply exit our short straddle position. By not keeping a fixed stop loss into the markets, any sudden whipsaws will not hit our stop loss that will save us most of the time in the volatile markets. You can refer this link to learn more about this strategy https://squareoff.in/1-short-straddle-option-selling-strategy/

Here’s how you can back test this strategy

We are running this strategy as a free trading bot at https://squareoffbots.com/ that has made 30 lacs overall profits for bot users in last 5 months. With 1 lot, trading with 3 lacs per lot as capital, it has made around Rs.50,000 net profit after all charges in last 5 months.

If you are new to mechanical trading systems and wanted to explore more about trading system by back testing different option trading logic, then we would recommend you try out www.algotest.in

Please note that am not anyway associated with this platform, I don’t even know who are the people behind this wonderful tool, so before publishing this article I called the phone number listed in their site and wanted to check with them all details like, who is the founder, what he does, why Algotest is available for free. I end up talking to the founder for half an hour.

The name of the founder is Raghav, a prop trader who manages Crores of funds. Developing such tools is not new to him. In fact, he developed a robust back test engine for options back in 2007 using MATLAB. Raghav and his team developed their own internal tool to back test time based option trading strategies and other complex strategies that they use with their prop fund. I asked Raghav how they are able to provide the backtest platform for free when other platforms are charging for the same.

Raghav mentioned that it doesn’t cost them much currently, it costs them less than $500 per month which they can spend from their own pocket. And just because it is free, they haven’t compromised on the data quality. Algotest do not have any plans to bring any pricing plans, they wanted to keep it free and planning to add indicator based backtest as well in the near future. Even if no of users increases in the future, they wanted to add donation option like Wikipedia just to cover the cost, which I really appreciate it. But I guess Algotest shouldn’t have replicated the same UI from Stockmock, as there’s usually a lot of time and effort goes behind such UI design, making it simple is not an easy task at all, but its Stockmock who made the backtest more simpler with their fantastic UI.

The team behind Algotest.in seems to have superior tech background, hopefully they will work on all the feedback given to them by the trading community and come up with multiple parameters to backtest. When Stockmock was launched, i wrote a detailed article on how to back test and even did a youtube video explaining how easy it is to backtest, back then I din’t even know who was founder of stockmock. But I went ahead and shared it with many traders, I believe Algotest should also need similar reach as they aren’t charging their users, so I thought by writing this article and sharing it with larger audience, would really help lot of traders.

Twelve years before when Zerodha launched with Rs.20 flat pricing model, it disrupted the entire broking industry and now every large broker was forced to move to flat pricing model. Zerodha never compromised on their quality even though pricing was drastically lower. Now pricing disruption is bound to happen on back testing platforms and algo trading space. I will not be surprised, if backtest and Algo execution platforms are available at free of cost five years from now.

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13 comments on “How to back test Option Trading Strategy for free

  1. Why are u promoting a copycat tool. Someone has worked so hard to make stockmock and this is just a blatant copy.

    1. Yes, agreed. It really hurts when we put in lot of effort in building something only to see later its copied by a competitor. But that always happens and its harsh reality.

  2. For the same period, tested a strategy in both stockmock and algotest. Results are hugely different. Wondering who is correct….

    1. Every platform uses their own way to calculate how open high low close is used to calculate sl hit days, due to that result varies from platform to platform

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