Musings on Put Credit Spreads (Part 3)

Congratulations are in order if you followed the entirety of my last post. In going back to reread later, I got so confused that I decided to spend some time clarifying.

The straightforward understanding advanced traders have of multi-legged spreads like iron condors and butterflies may be illusory. Not only does design of a spread backtesting approach reveal multiple parameters to consider, trying to execute these beasts in real-time crash conditions can prove detrimental to financial health.

For this reason I prefer backtesting of elementary rather than combinatorial trading systems.

In the last post I wrote:

> Adjustments present like a fly in the ointment. If these are actually new trades
> then why backtest them together as opposed to closing one trade, starting another
> one, and combining the results?

I have reservations about a February 9, 2016, Tasty Trade presentation where a naked put trade is compared to a favorable adjustment strategy rolling the tested put out in time. Two strategies are being combined in a somewhat-arbitrary fashion: an OTM naked put and an ATM [rolled] naked put. Only a fraction of the occurrences required rolling and the positive performance of those ATM puts might be a fluke.

Viewed another way, the rolled put will be profitable if volatility trades sideways or lower. Volatility always mean-reverts but live-trading requires capital allocation around a volatility stop beyond which I will have no capital left for additional trades [rolls]. “Trading small” marginalizes this practical concern because it implies I always have plenty of capital in reserve but I question whether I could ever run a viable trading business and pay my monthly living expenses this way unless I were a multi-millionaire to begin with.

The Tasty Trade team did allow for only one roll but they did not give a maximum drawdown analysis, which would help to better assess the viability of rolling.

In addition, I certainly believe the OTM and ATM naked put trades should be backtested independently in large sample size to get a clearer understanding of performance.