Framework for Backtesting Super Trader Karen's strategy

During the holiday season, our super trader study group made some progresses. We started using TOS software to back test Karen's strategy. It will take quite some time for us to complete it. Here're some of my initial thoughts that I can share.

The ThinkOrSwim software provides two features that can be used for back testing: ThinkOnDemand and ThinkBack. The TOD supposedly offer a market DVR that records all market data at intraday as stated by the vendor's announcements. In reality, we found it not suitable for any option strategies that use high probabilities. These type of strategies require usages of far out of money strikes which are missing in TOD. TOD offers most option Greeks up to 10 strikes. Delta for far OTM options can be retrieved in TOD, but other important Greaks and ITM probability numbers are not available. The implied volatility of far OTM options are also available, but not consistent with actual IV in trading window as pointed out in a previous post. Additionally, the important market crash data happened in 2008 are not available in TOD.

The ThinkBack (TB) feature supports end-of-day data for a lot more option strikes, including the Greeks and ITM probabilities. So we have to use the ThinkBack feature in our back tests in order to find the option's ITM probability, etc. NOTE: The Greeks presented in ThinkBack were reported to have some discrepancies in my post before.

Going through TB manually for any serious back tests are not practical, as it requires users to click on each date. The ThinkScript (TS) becomes handy to help the back tests when used together with the TB. The TS can be developed to show all entry, exit, adjustment points on a chart, along with other important trading portfolio information. However, there are also limitations by TS: the ITM probability is not accessible and option Greeks can not be cross- referenced in a portfolio that includes multiple options.

Back-testing under the above mentioned constraints is challenging. But I believe it will still provide some insights about the strategy. I have created a step-by-step guide for how to use ThinkBack and ThinkScript to perform back tests on the super trader's strategy in a document. Using an initial version of our script, it gives a couple of charts that illustrate a simple strangle trade and a short call trade.