Test 5: Targets, Stop Losses and Min Premium

Now its going to get more interesting. We combine Profit targets, Stop Losses and Minimum Premiums together to see if combined they are greater than individually.

For this test, I am going to use the same Profit Target and Stop Loss parameters in the past tests. I am also going to use the historical average premiums as an entry point into the trades (i.e. the minimum premium is set to the average historical premium).

High Level Breakdown

The breakdown suggests that once again the front-month trades are harmed by these trade parameters, but the 2nd and 3rd month trades find improvements.

1 Month 2 Months 3 Months All
Improved PF 211(23%) 558(62%) 657(73%) 1426(53%)
Improved MaxDD 900(100%) 900(100%) 900(100%) 2700(100%)
Improved ExpRet 218(24%) 359(40%) 553(61%) 1130(42%)

Profit Factor Improvement

A heat map of the profit factor improvement (over the baseline) shows much more detail. Generally speaking, all parameters decrease performance for front month trades. The high delta trade for the front month does show marginal improvement consistently, but not enough for me to be confident.


The second and third month trades are a different story. It is hard to find an exact pattern, but we can claim that generally adding these parameters improves performance of these trades, with substantial gains for lower delta trades (i.e. Delta 10). The Delta 10 trades in the second month and some of those in the third month have massive improvements in performance compared to the baseline. Ideally I would like to see the neighboring trades (i.e. Delta 15) also experience similar but diminished gains in order to point to a possible pattern, but that is not the case (it could be that my resolution is not fine enough and that Delta 12 trades show that diminished improvement).

Looking deeper at the specific trades of one neighboring trades (all things being the same except the delta), its trades experienced 6 losses instead of one. This may add to the credibility that the low delta trades improvement was not just due to luck.

Expected Returns

A heatmap of the expect returns of each scenario shows that generally speaking

  1. High Delta trades still perform poorly regardless of month
  2. Very Low target trades perform poorly,
  3. Low stop loss trades perform worse
  4. Front Month trades perform best when the target is > 70%, Deltas <= 25, and stop losses > 30%
  5. Second and Third Month trades perform best when Target >= 30%, Stop Losses >= 20%, and Deltas <= 25%


We can also look at the top three trades for each expiration period so gain similar insights.

Month Delta Target StopLoss ExpRet MaxDD PF WinRatio Trades AvgDays
1 1st 0.10 90% -90% 6% -127% 2.2 93% 89 20.8
2 1st 0.10 90% -100% 6% -127% 2.2 93% 89 20.8
3 1st 0.10 90% -60% 6% -127% 2.2 92% 90 20.4
1 2nd 0.10 40% -60% 6% -71% 10.4 99% 115 19.1
2 2nd 0.10 40% -70% 6% -71% 10.4 99% 115 19.1
3 2nd 0.10 20% -70% 3% -71% 8.7 99% 180 10.1
1 3rd 0.10 20% -70% 3% -78% 7.1 99% 151 15.2
2 3rd 0.10 20% -80% 3% -100% 5.5 99% 151 15.2
3 3rd 0.10 20% -90% 3% -100% 5.5 99% 151 15.2

Those are some impressive win ratios. Those with a 99% win ratio only experience a single loss, and it was during the Oct 2008 market crash.

It is also interesting to note that as the expiration period increases, the expected return decreases by so does the average duration of the trade. Trades with shorter duration may be sitting on the sidelines frequently.


The combination of targets, stop losses and minimum premiums seems to substantially improve low delta trades in the second and third month, and to a lesser degree most of the other trades in those expiration period. But again, while the risk in the front month trades was reduced, the overall profit factor of almost all trades was also reduced.

Test Stats

Permutations 2700
Profitable Scenarios 1745 65%
Total Trades 526411
Profitable Trades 229165 44%
Expired 59983 11%
StopLoss 48866 9%
TargetMet 417562 79%
Test Duration 2.60(min)

Test Files

Excel Test Results

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