Naked Puts (Part 1)

Like I did for naked calls, today I will start to analyze my data on naked puts.

As an aside, I listened to a podcast this morning by a guy who supposedly trades for a living. He argued most traders fail because they cannot define their trading edge. He emphasized discretionary traders at one point because they are notorious for not having statistics to back their methodology.

I agree with that because usually with discretionary trading, parameters are not the same from one trade to the next. A set of guidelines might have a range over which action should be taken. An infinite number of possible trades may result depending on where action is ultimately taken and “gut instinct” is usually the deciding factor.

The goal of this post is to put some context around naked puts and try to determine whether they provide an edge.

I backtested from January 2, 2001, through October 2, 2015: 3,695 trades total.

87.8% trades (3,253) won.

12.2% trades (452) lost.

Mean days in trade was 27.6 with a standard deviation of 10.6.

Mean profit on 2,760 trades was $14,585 with a standard deviation of $1,929.

Mean days in winning trade was 29.7 with a standard deviation of 9.45.

Mean loss on 452 trades was $47,833 with a standard deviation of $17,551.

Mean days in losing trade was 17.1 with a standard deviation of 10.9.

Average trade: $6,970

Average annual profit: $92,257

Profit factor: 2.19

Really?

The relative magnitude of most of these dollar amounts is not so important. I backtested this with a position size four times larger than that of the naked calls.

One system statistic that I think speaks volumes is the 2.19. This is definitely worthy of a second look.