How to Use the UpTrade Backtester

The UpTrade backtester was designed for self-directed investors who understand the benefits of adjusting option positions well before option expiration.

The backtester’s short-option strategy focus includes:

- Covered calls
- Short Puts
- Short Strangles

Covered calls and short puts are relatively conservative option strategies. Used together, these strategies can help traders get into a desired stock position (via assignment on a short put), and then get out of a position (via assignment on a covered call) at a modest, but relatively consistent, profit.

Before we explain how the backtester works, let’s quickly review the basics of short option trading.

Here is our short list of the basics:

Your First Backtest

Log into UpTrade.

Navigate to “Backtester” from the main menu on the left side of the trade ticket. This will launch the backtester trade ticket.

There are four fields that set up the trade.

- - Control: locked down to self-managed strategy.
  - Symbol: One of 600 top-volume optionable symbols.
  - Strategy: Covered call, short put or short strangle.
  - Label: This is automatically populated — but can be edited.
  - Day-by-day Check this box whenever you want to proceed day-by-day when you hit the resume button, otherwise it will fast forward to the next date where there is an actionable prompt.

Set Your Start Date

The first thing you have to do is set the start date for your simulation. The backtester defaults to the present day, so you have to set it for a date in the past.

Placing your Order

Once the strategy has been set up with a specific underlying stock symbol, a summary of the trade is displayed off to the right. Here you adjust the number of contracts and the strike price(s) you want to execute in your trade.

The backtester will offer default values for your simulated trade. The default number of contracts will be one contract — representing 100 shares of the underlying stock. The default strike prices will be at a level between 15 and 30 delta — depending on the strategy. Think of delta as the probability of the option expiring “in-the-money” — something you do not want to happen since you represent the short side of the trade. The long side of the trade likes “in-the-money”. As a short option trader, you like “out-of-the-money”. If you are short an option with 30 delta (30% chance the option will expire in-the-money) you will have a projected 70% chance of the option expiring worthless. That’s a good thing, because in that event, you get to keep the premium you collected from selling the option.

The default expiration dates are typically the next monthly expiration date closest to 45 days out. All of these values can be adjusted within certain realistic parameters.

Once you are satisfied with the setup parameters, or even if you want to accept all the defaults as they are, go ahead and press the button to execute the order. The backtester will then initiate the trade and start the testing process.

Start paying attention to the delta and premium amounts. These are metrics worth tracking.

45-Day Chart

If you want to start a monthly performance spreadsheet, use the chart below to set up trades that start at the beginning of the month and expire about 45 days out.

The Resume Button

Hit the “Resume” button to progress through time.

If the day-by-day box is checked, time will proceed one day per click. If the box is unchecked, time will accelerate to a date where the next significant event occurs. You can check or uncheck the day-by-day button at any time during a simulation.

Managing with Prompts

After the strategy is traded, the right side will show flagged events called “prompts”. Once a trade is put on, the application will keep track of how much premium you have collected, what your breakeven prices points are, and whether or not your position is being “tested”. This is the robo advisor part of the application.

A position is tested when its intrinsic value exceeds the amount of premium that you have collected. Intrinsic value is also referred to as “moneyness” — the amount that a long option position is in-the-money (the long position held by the counterparty, not you). As a short option seller, you don’t like intrinsic value.

There are no 100% fail-safe moves. Instead, you often have choices that involve risk. Every adjustment has pros and cons as you will learn. Don’t worry, you will get the hang of it. You can easily repeat a simulation after you close it.

You might see certain generic prompts, such as “Close”, that are not triggered by any particular event. You may have to scroll to find those actions.

Closing a Trade

American-style options are unique because a position can be closed at any time before expiration. We strongly encourage you to close a short-option position when it hits 50% of the maximum profit. After some of the bolder defenses are implemented, you should close a position at 25% max profit, or in cases where there is little hope of profit, at breakeven.

In certain instances, you are best off closing a losing position early or managing in order to minimize a certain loss.

Short Option Traders are Cool

After spending time with the backtester, you will find that most of the management tactics are defensive in nature. Some are offensive. All of them are best executed with the knowledge that you are managing price-movement probability to your advantage.

As robo advisors for short option trading, we are part of a group of traders who believe in generating premium by leveraging probability in our favor. We like house odds. If someone needs to buy insurance, we are willing to sell insurance. If someone wants to spin the wheel of fortune, we are ready to sponsor the wheel.

We are short option traders.

Some Suggested Trading Guidelines

Trade Small. There are important reasons to trade small. Trading small (one contract per symbol) will allow you to diversify your positions across multiple sectors, and multiple symbols, ensuring that probability will continue to work in your favor. You can also better absorb a loss on a position that will inevitably occur from time to time. The essential concept is to trade small enough to keep some buying power in reserve. As a short-option trader, you will experience a loss. And that loss may be many times what you collected in premium. That moment will feel a lot less onerous if you trade small.
Manage Your Positions. As a trader of American-style options, you can close one leg of a strategy and sell a different leg before expiration. This action is called "rolling an option". When you roll an option, the end goal is to improve your position. The UpTrade backtester is programed to identify rolling opportunities -- often defensive in nature because they salvage the success of the trade. If your short-option position is ever tested (i.e. it shows a significant unrealized loss) the backtester will flag the event and stage relevant defense moves. But while defense moves can work to increase the probability of making a profit, they can also decrease the magnitude of a profit, or in certain instances, increase the magnitude of a loss. The latter will occur if the price of the underlying security moves dramatically in both directions -- commonly known as a "Whipsaw" event. Ultimately, defense moves are yours to evaluate and implement.
Practice the Basic Trades. The UpTrade backtester excels at simulating real-life trading decisions. If you practice enough trades, you can't help but become a better trader. The key is to use any simulated losses as a learning experience that will help you develop a better understanding of the expected risk-reward tradeoff. It's best to start with the more conservative strategies. Trading short puts on stocks that you would not mind holding for a year or longer provides a good springboard into more complex strategies. If you are assigned shares of stock as a byproduct of selling a short put you can turn around and write covered calls to collect more premium on the shares you are assigned. When covered calls expire worthless the net effect is to lower the cost basis of the underlying shares. Don't forget, however, that short-term profits, including premiums collected from selling short options, are taxed as ordinary income.
Ease into Short Strangles. Finally, feel free to experiment selling short strangles, a strategy reserved for the most experienced option traders. Short strangles are often cited as the prime example of a short option strategy where the trader assumes "undefined risk". That probably does not sound so good if there are limits to how much you can afford to lose. Short strangles are not for the faint of heart. But they are certainly entertaining. And if you accept the notion that you will be staring down the barrel of a big loss, from time to time, they can deliver the highest rate of return on capital.

The Poor Man’s Strangle

September 25, 2021
by Peter Seed

Those of us who trade short puts may have unwittingly executed fully-covered short strangles. Here’s how.

To prevent loss exposure, brokers assign different level option trading permissions based on a trader’s means and experience:

Level 1 – Covered Calls
Level 2 – Cash-protected Short Puts
Level 3 – Debit Spreads
Level 4 – Credit Spreads
Level 5 – Naked Options

Generally, the higher the options-trading level the higher the potential loss. Selling naked options at level 5 can result in loses far beyond the cost of selling an option.

Suffice to say, short strangles are completely out of the reach of lower-level traders. But maybe not.

Consider the poor-man’s short strangle. This is a strategy that starts with 100 shares of stock. You may have been assigned the shares because you wrote a short put that ended up in-the-money at expiration.

You can leg into this strategy. First, you write a covered call on the shares you own at a strike price above break-even.

Next, If the share price dips even lower, or doesn’t move very much, you can write a short put below the already-beaten-down share price. That short option is a cash-protected put.

Voila. You have a share- and cash-protected short strangle.

One of three scenarios will play out:

The price of the stock goes up beyond the call strike and your shares are called away – hopefully, at a profit.

The price of the stock ends up between the put and call strikes, lowering the cost basis of the shares held by the premiums you collected.

The price of the stock falls below the put strike and you are assigned (buy) another 100 shares – lowering the dollar-average cost of all shares you hold.

Note this is still not a defined-risk trade. You could be exposed to more downside risk if you end up holding twice the number of shares. But this strategy might make sense if you are trading small and have dry powder in reserve.

We have combed the message boards and never found instances of this kind of strategy discussed. We are open to other names for this strategy. At UpTrade, we call it the Poor-man’s Short Strangle.

Why the IRS Needs Brokers

September 9, 2021
by Peter Seed

Why the IRS Needs Brokers

Within the Infrastructure Investment and Jobs Act bill that recently passed in the U.S. Senate, there is a pay-for provision that blanketly categorizes anyone who manages cryptocurrency lending sites as “brokers”. But it doesn’t stop there. It even mandates that all users of DeFi staking sites are brokers.

Wow. What a concept. If you use a decentralized exchange like Uniswap, you may become a broker. What a world.

Let’s get serious for a moment. A user of a DeFi exchange is not that same as being a broker. So why codify such a ludicrous concept? To understand the big picture, one must get to the heart of how we define brokers.

Start with a simple definition comparison. A “broker” is not the same as a “brokerage”. One is a person, the other is a business. One provides a service, the other provides a business infrastructure for the people who provide the service.

Brokerages play a role in the IRS enforcement process when they provide clients and the IRS with 1099s reflecting profits made from client investments. Ostensibly, when a business creates a 1099, related to client capital gains, there is a higher likelihood that the client will pay the tax on those gains.

Brokers have been written into IRS history, as well.

A major job creation bill that originated in 1994 is called the QSBS 1202 program. “QSBS” stands for Qualifying Small Business Stock. It was created to encourage venture capital investments in start-up companies. One could argue that that for 27 years the program has created a lot of new jobs. The QSBS program allows a 100% tax deduction on profits earned from an IPO or from an exit, but only if the business is structured as a C-Corp. Okay, makes sense. We don’t want doctors (service providers) to create a C-Corp practices, run them for 40 years and then sell them for a completely untaxed capital gain. The language in the QSBS program even specifies service people who are excluded from the program: tree farmers, athletes, lawyers, architects and (yep) “brokers”.

At the time (1994) brokers were people who performed a service business – people to people. If service businesses were to be excluded, then it made sense to define a broker as a service provider. But the net effect has been to exclude the entire fintech industry – most notably, online brokers catering to self-directed traders.

If the blockchain-stakers-are-brokers concept makes it into the final version of the Infrastructure Investment and Job Creation Bill, then we will have an overstep of taxation authority. The SEC knows it cannot enlist self-directed individuals to file 1099s, so why not make them brokers? As currently written, it will do just that.

The Beginning of the Self-driving Wallet

August 14, 2021
by Peter Seed

Title: The Beginning of the Self-driving Wallet

Just as self-driving cars can interpret acceleration, traffic flow and braking, self-driving wallets can analyze market trends, pick a stock and execute trade strategies.

Most investors gravitate toward equities representing companies with a track record of growth, cash in the bank and a strong management team. The idea is that healthy companies have the best chance for sustained stock appreciation.

As a pioneer in this space, currently in development, the UpTrade platform will be one of the view platforms that will be able to execute algo-driven trading on top of API-connected online brokerages. This is how UpTrade’s process will work.

First, UpTrade screens stock candidates representing healthy business fundamentals. Candidate stocks are well rated by stock analysts, have a solid quick ratio, quarter-over-quarter sales growth and a relative strength ratio less than 60 – just to name a few selection criteria. The point is, they are fundamentally solid as potential buy-and-hold candidates.

Second, rather than buying a stock at the prevailing market price, UpTrade takes basic steps to strategically time market entry into an equity position. Nobody can pick ideal times to enter a stock position 100% of the time, but the age-old adage “buy on the dip” is certainly a well-worn strategy and one that UpTrade will use on a regular basis to enter the market.

Monitoring a position by accounting for the real-time-value of money is a key factor. Machines do this very well. In phase three, UpTrade will monitor the position for an optimal exit point. Finding an optimal exit point often depends on a trader’s risk tolerance and the frequency with which a trader intends to withdrawal profits. Tax considerations also play a role.

Getting Away from the Coin Flip

Any stock pick is a coin flip as to whether it will generate a profit within a relatively short period of time. In the long run, most buy-and-hold strategies will generate a profit. But short-term investing can be a different animal. Throw meme stocks into the mix and it is nearly impossible to consistently pick winners.

A casual visit to a Reddit stock trading forum will reveal a new investment strategy worth noting – wheel trading. Basically, it is an option-trading strategy involving selling short-put options to get into a stock position and selling covered calls to get out. Traders swear by this strategy. UpTrade will automate it.

Buying on the Super Dip

Selling short options provides the potential for an additional discount on top of a normal price dip. The short-put trader enters an obligation to buy a stock at a price below the current market price. Thus, if there is a slight dip in the stock price, the short-put trader can get an additional 2% to 4% discount off the current market price by selling a put.

When the trader sells a put option, the short trader collects a premium. That premium reduces the basis cost of buying the stock if the shares are assigned at the strike price. And there is one other advantage. If the stock price goes up, the short-put trader keeps the premium without ever taking delivery of the stock. That’s called income generation. The use of short option strategies is a key piece of investment strategy that will be automated by the UpTrade platform.

Algo trading is a smart way to manage the higher risk side of an overall portfolio. No trader should go into option trading without knowing the basis, but if you grasp the concept of selling options, UpTrade wants to give you access to a smart, self-driving wallet that can generate short-term income.

The Lesson of the Max-loss Threshold

July 20, 2021
by Peter Seed

The Lesson of the Max Loss Threshold

Since I am a short-option trader, so I like to collect premium. Often feel like I am just raking in the money. I routinely close positions at 50% max profit. But every once in a while I get “tested” – sometimes by a lot.

One short-strangle trade worthy of sharing was with symbol GSX. In November 2020, I put on a short strangle on GSX. There was one short contract per side – 20 strike on the put side, 40 strike on the call side. At the time, GSX was trading at $30 a share and I collected about $500 in premium. All good, I thought.

Within a matter of days, GSX when to $120. And there I was… holding a 40 short call.

Yes, I made all the standard defense moves, but there was no stopping this black-swan, three-standard-deviation price move. Months later, I eventually took a $14,000 hit – a 28X loss. And it was a sobering event.

I learned a super-important lesson from this trade: You should always respect a loss threshold — beyond which you will mechanically close the position – no matter what. My close threshold is this: Whenever there is a 4X loss (unrealized) off the basis equal to the total amount of premium collected on a position, I close the position.

Inexperienced traders tend to treat a hard-close signal like this as a guideline rather than a rule. That once included me.

With the GSX trade, I did not have the benefit of an application that flagged my 4X loss – three days in. (I made that trade through Schwab). If I did have that flag, I would have closed the position after three days. Absent that, I was in for a bumpy ride.

From now on, using UpTrade, I will always exit a position whenever that prompt shows up – even if it pops up one day after I put on a trade.

Gamestop and the Big Reveal of Inefficient Markets

February 20, 2021
by Peter Seed

Gamestop and the Big Reveal of Inefficient Markets

On February 18, 2021, the House Financial Services Committee held a hearing related to the activities of January 28th where shares of about a dozen stocks touted by a Reddit community (WallStreetBets) made some black-swan price moves. It was a classic, social-media-fueled “pump and dump” scheme. Included in those stocks were Gamestop (GME) and AMC Theaters (AMC). Gamestop got the lion’s share of publicity because the price of its shares went from $20 to almost $480 in two days. This was followed by an equally jarring retrenchment to $45, two weeks later.

As someone who has participated in four online brokerage start-ups over 20 years, this was must-see TV. What was interesting to me was the search for a clear narrative, or more accurately, a reason for the hearing in the first place.

Here were some of the issues in play:

Payment for Order Flow. Payment for order flow, pioneered by Bernie Madoff (of all people) is an incentive payment offered by market makers (and some exchanges) in order to get the right of first refusal orders that are profitable to fulfill. The CEO of Robinhood, Vladimir Tenev, revealed that payment for order flow is an important part of his company’s business model – representing most of its revenue. These incentives, he maintained, are the reason they can offer commission-free trades. He went on to point out that when Robinhood first started as a business, no one believed that payment for order flow could ever support commission-free trading – no way, no how. But it did. Because of deep-pocket investors and a youth-orientated, mobile-first product offering Robinhood acquired millions of customers over a five-year period. Furthermore, the success of Robinhood was transitional to the industry.

Let the People Trade. Most of the witnesses were of the mindset that self-directed traders are a benevolent force in the financial ecosystem. Hard to argue with that. But some Representatives focused on calling out riskier trading strategies (like options) as the gateway drug to certain ruin for young, self-directed investors. Trouble is there are certain options trading strategies that are less risky than buying stocks alone — covered calls and cash-protected puts, for instance. In my view, Representatives need to get more familiar with the subject matter before making blanket statements about trading risk.

Robinhood is the Bogeyman. Because Robinhood is the preferred platform for most of the WallStreetBets crowd, Representatives believed it was culpable for the social-network dump-and-dump scheme. In addition, Robinhood was on the hot seat for gamifying its site to the point that it was too easy for young, inexperienced investors to make high-risk trades. A few Representatives cried foul because Robinhood restricted some trades while it scrambled to raise $3.5 billion to cover a clearing deposit requirement. For those not in the know, the U.S. stock market has a clearing process that requires brokerage firms to post a deposit to cover counterparty risk (the risk that a trade will not clear) during a two-business-day clearing process. So why do brokers have to cover that two-day risk? Good question. Probably because no one else can be reliably tapped to pay for it.

How Dare You Stop the Buy Orders. Most of the Representatives felt that Robinhood failed miserably when it halted trading on a dozen symbols right when the social-media-fueled, pump-and-dump scheme was at its peak. Man… was that off the mark. If your Clearing House demands you must pony up $3 billion dollars in a matter of hours, and the alternative is a complete liquidation of all customer portfolios, what would you do? Although Mr. Tenev never brought it up, many traders were spared a record loss that would have been all but certain had they bought GME at $400. It reminded me of when Twitter banded Donald Trump. Sometimes big tech can be the only adult in the room.

We Need Better Infrastructure. A very compelling case was made for putting resources into improving the trade-clearing infrastructure. If trades were cleared in near real-time then no more surprise deposit increases. The present system is archaic – especially since technology is readily available to provide much more efficient clearing. Ultimately, the problem comes down to who should pay for a better clearing system.

Overall, I found the hearing interesting. Yes, it was all over the map, but it was fascinating to get the full gambit of thoughts and opinions.

I predict the net of this whole inquiry process will be the revelation that the stock market’s exchange system is a jumbled mess of old technology.

I hope that in the future, the panel will address how blockchain technology can improve the process of clearing trades and allow trades to be cleared in near real time. That will save everybody money.

State of Ethereum – October 2020

October 21, 2020
by Peter Seed

The State of Ethereum as of October 2020.

The Summer of DeFi

On October 14, 2020, I attended the invest: ethereum economy conference sponsored by CoinDesk.

Although we did not gather in the Golden Gate Park, there was a lot of talk about the Summer of DeFi. Everyone seemed to agree that due to the popularity of DeFi, Ethereum gas prices were too damn high!

There were several scaling solutions presented at this conference.

Proof of Stake Roadmap

Vitalik Buterin summarized the state of Ethereum’s planned upgrade from “proof of work” to “proof of stake” by giving a full history of how Ethereum has progressed over the years. Ethereum 2 will vastly increase the transactional capacity of the public Ethereum blockchain. Once in place, it is expected to handle up to 100,000 transactions per second – supported by side chains also referred to as parachains. There will be three phases of implementation over a two-year period.

- Phase 0: (Q4 2020) – Launch of the Beacon Chain
- Phase 1: (2021) – Integration of Shard Chains controlled by the Beacon Chain
- Phase 2: (2022) – Full migration of Ethereum 1 chain into the Ethereum 2 chain

More detail on the roadmap is here.

Vitalik dropped two other milestones in the mix that gave us something to explore right now:

- Roll-ups (ZK roll-ups or Optimistic roll-ups)
- EIP-1559

Roll-ups

Roll-ups address scalability by deploying side chains. ZK roll-ups are feeding into the main net, already. So that was encouraging. After researching some solutions, my walk-away was that these bolt-on side chains will add complexity to any development project. Having said that, side-chain communities will likely develop around specific fintech operations such as robo staking.

As far as roll-up infrastructure goes, Polkadot seems interesting – especially when used in conjunction with Moonbeam or the Optimum Virtual Machine. Polkadot is still on testnet but will be live soon.

The Optimistic roll-up is worth mentioning, as well. This scheme relies upon game-theory-driven incentives to support validation between layer 1 (on-chain) and layer 2 (off-chain). Blockchain applications are essentially split into two components. Layer 1 manages the data. Layer 2 handles the computation. This scheme vastly speeds up computing power of smart contracts.

EIP-1559

The most exiting presentation was the upgrade project called EIP-1559. This upgrade would be within the Ethereum protocol, thus, no bolt-ons. Once implemented, it will restructure how gas fees will be set in conjunction with control of block sizes. In other words, prices and quantities will both be be controlled. There will also be a relief-valve mechanism that reverts to the current pay-to-play auction scheme when there is block congestion is detected. I will spare you the details of exactly how that will work. Suffice to say, it will be very welcome upgrade.

My read of EIP-1559 is that it is akin to an automated monetary policy within the Ethereum infinite machine that will provide a higher level of social economic efficiency.

Here is a good summary of EIP-1559.

Here is a deeper explanation.

Taking all the activities discussed at this conference into account, one analyst pointed out the all the Ethereum initiatives point to a steady decrease in the liquid supply of Ethereum. In the future, a sizable percentage of all Ether will be staked or burned – at least much more than it is now.

We all know from economics 101 that decreasing supply of a commodity will cause prices to rise. UpTrade’s Blue Horseshoe foresees a bull market for Ethereum capped by the holy grail of Ethereum 2.0.

DeFi for the Masses

July 8, 2020
by Peter Seed

How Ethereum has captured decentralized finance.

Perhaps you have read that the latest trend in robo-advisory is DeFi. DeFi stands for decentralized finance. “So what?”, you might ask, “Why should I care?”

Well, let me just say that Defi has significant value to self-directed investors. It is based on the Ethereum blockchain which is used for creating smart contracts in the blockchain. These smart contracts are fully automated applications. They are infinite machines that operate without a centralized authority devoid of administrator interference and inefficiency.

One of the biggest advantages of DeFi applications is staking. Staking is a process where Ether (the blockchain’s unit of value) can be locked up as collateral in a smart contract that functions like a robo bank.

No financial investment is risk free, but properly executed, staking can take advantage of interest and capital gains on Ether at the same time. Borrowers can borrow digital money pegged to the dollar, called stablecoin, without a loan application. All that is needed is collateral in the form of Ether – the utility token that powers the Ethereum blockchain.

If low interest loans are not your thing, you can deposit your Ether in a smart contract that pays you interest. Interest rates can be as high as 10% but typically vary from 5% to 10% — depending on demand. Interest is compounded in real-time and you can withdraw your money in any amount at any time.

Does this mean that staking Ether pays risk-free interest? Not quite, but it sure beats the typical 1% interest you might get from money-market sweeps of free cash in a brokerage account. Right now, interest on a 3-month T-bill is 1.28%. UpTrade incorporates an easy to use staking process that makes the process easy to implement.

Ether has been on a tear, lately, in anticipation of what is called Ether 2.0 — a major overall of the Ethereum public blockchain that will increase the scalability of Ethereum ten-fold. A price chart of Ether shows the price of Ether has tripled since March 2020.

The resurgence of the price of Ether is likely due to it’s dominance in the DeFi marketplace with sites like Oasis or Staked. Unlike Ethereum, the Bitcoin blockchain cannot hold smart contracts. If the trend holds, Ethereum will likely led the way.

At the very least, Ether is a good diversification asset. More importantly, Ethereum has brought self-directed banking to people who want to control their own financial future without having to sell an underlying asset and without having to wait until the bank is open for business.

Options Backtester for Fun and Practice

UpTrade is the world’s first robo-advisory for short options trading.

We are pleased to announce that we have launched our short-option-strategy backtester. This is just the first milestone in a product plan that includes live trading on top of brokerage APIs, connectivity to live investment advisors, fully-automated, short-option trading and seamless connectivity to DeFi applications.

Why Short Puts?

If you are familiar with options trading, you should first know that buying long options, a strategy that relies on market-direction sentiment, is often a risky proposition. Buying long puts, or long calls, is a leveraged investment. And leverage usually means risk. If your sentiment proves to be right, you can make a nice capital gain. But the odds of success are not in your favor.

Now consider the other side of the trade – being the option seller. That has better odds of success – house odds, some would say. We recommend starting by selling short puts.

As a first-time option trader, it may seem like there are an overwhelming number of alternatives to digest. How far out of the money should an option be sold? What expiration date is best? What do I do if I am assigned shares?

To help you weed through these issues, UpTrade automates the process of setting up and managing strategies. This cuts through the grumbly of putting on the trade from a complex trade ticket. UpTrade sets up a good starting position with a reasonable strike price (with 70% odds in your favor) and a realistic time until expiration (usually close to 45 days).

But before you dive in, you should know that not every option trade turns into gold. You should accept the notion that if the strike price is ever breached, you may be assigned 100 shares of the underlying stock for each contract you sell. Being assigned means you will automatically purchase shares at the put option’s strike price. This event will eat up buying power, or generate a margin call, if you don’t have enough money in your account. So beware.

Here is the good part in that equation: If you are assigned shares, you get to keep the premium you collected when you sold the option short. This effectively lowers the cost basis of the stock below the strike price.

One last trading tip: You should not wait until the short put option expires. Instead, consider closing out your position as soon as you reach 50% of the maximum profit possible on the trade. By doing this you take risk off the table and realize a sure profit.

“You never lose money by making a profit.”
-anonymous wise trader

Prove it

Our backtester proves what we mean by selling short options. Feel free to try it out. We have option price data going back two years for 600 of the most-traded underlying stocks. You can trade short puts, covered calls or short strangles. Pick a symbol, and a start date, and our robo-advisor sets up the suggested trade.

Push the Trade button to start the backtester and the resume button to resume if there is a pause in the action.

Remember to check the box to step through the strategy one day at a time, otherwise by default, you will jump ahead to the next significant event. UpTrade will post strategy-management prompts for your consideration along the way.

A complete guide to our backtester is here.

Make it Easy to be Smart

UpTrade brings smart trading to the masses. By learning the basics of short option trading, based on historic data, you can practice entry and exit points, along with various rolling strategies, before you risk real money.

Trade on, trade up.