Backtest methodology

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Three-Month Strategy Evaluation — 2025

This document explains how BigDipperOptions evaluates spread performance using historical market data.
The methodology below shows exactly how results are generated and how trading performance is measured, helping traders understand risk, timing, and consistency across market conditions.

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Overview

The backtest reviews spread opportunities identified during each trading session and tracks their performance using strict, consistent rules:

• Three consecutive months (2025) of historical market data
• Each spread is selected once per trading day at a fixed time (10:00 AM ET)
• Performance is monitored continuously until the spread expires

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Why Use a Fixed Selection Time?

Option spreads may appear many times in a session as prices move.
To avoid duplicate tracking and ensure consistent evaluation, a single snapshot is used:

• Only one spread per symbol and expiration is selected per day
• The selection is always at 10:00 AM New York time

This prevents:

• Double counting of opportunities
• Inflated performance statistics
• Unrealistically high trade frequency

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Spread Selection Rule

Selection Time:

10:00 AM New York time

Why this hour?

• Liquidity has normalized after market open
• Bid/ask spreads are tighter
• Market direction is clearer; positioning is underway
• Execution is more realistic and practical

Rule:
If a spread appears multiple times, only the instance at 10:00 AM is recorded. Later repeats are ignored.

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How Spreads Are Tracked

Once a spread is selected, its value is tracked with high-resolution pricing:

• Minute-level interval data is used (both legs tracked separately)
• Produces realistic spread value changes and profit/loss swings
• Spread value tracking continues every minute until the spread expires—regardless of whether profit or loss thresholds are hit
• This approach supports a full picture of the spread’s value evolution throughout its entire life

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Calculating Spread Value

At each minute:

• Spread value is calculated based on the prices of both legs:
  • Short leg price minus Long leg price or
  • Long leg price minus Short leg price
• The direction depends on the spread type
• Values are updated each minute to reflect true intraday price moves

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Example

• Bull Call Spread:
  Spread value = (Long call price) – (Short call price)
• Bear Call Spread:
  Spread value = (Short call price) – (Long call price)

This real-time tracking continues until the option expires.

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Profit & Risk Thresholds

Each spread is measured against two predefined outcome thresholds to simulate real-life risk management:

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Profit Target

• 50% Profit Target:
  When the spread value reaches a 50% gain relative to entry, the profit outcome is recorded.

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Risk Threshold

• −50% Loss Threshold:
  When the spread value drops to a 50% loss from entry, the risk outcome is recorded.

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Recording Outcomes

Whenever a threshold is reached (at any point before expiration), the following is saved:

• Date and time reached
• Spread value at that moment
• Outcome type

If neither threshold is hit before expiration, the final outcome is recorded as “Expiration”, along with the final value.

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Recorded Outcome Table

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Example Outcome Records

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Why Use 50% Thresholds?

The 50% thresholds are widely used in options trading for structured risk control:

• Capture larger profit targets while managing risk
• Allow for extended duration and trend-following
• Encourage objective, disciplined exits at the 50% level
• Reduce emotional trading decisions
• Consistently applied to all spreads, every day

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How Long Is Each Spread Tracked?

Tracking continues for the entire life of the spread until expiration, recording the value minute-by-minute:

• If 50% profit is reached, it is recorded at that moment (but tracking continues until expiration for analysis)
• If −50% loss is reached, it is recorded at that moment (but tracking continues until expiration for analysis)
• Regardless of outcomes, spread value is tracked continuously until the option expires

This approach allows for realistic and detailed examination of the spread outcome and its path over time.

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If Neither Threshold Is Hit…

If the spread never reaches either threshold before expiration:

• Outcome is recorded as Expiration
• Final spread value at expiration is captured
• This reflects realistic position management and statistics

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Sample Size & Consistency

• Three consecutive months (2025)
• Each month’s results are analyzed independently, then combined
• This approach highlights:
  • Consistency through time
  • Robustness under different conditions
  • Stability of strategies

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Important Assumptions

All trades in the test use uniform, explicit assumptions:

• Entered at observed market prices (no “favorable fill” bias)
• No slippage or commissions are included
• Positions are monitored continuously, minute-by-minute
• Spreads are tracked through expiration, with exits assigned immediately at the moment thresholds are breached

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What the Backtest Measures

Measurables include:

• Frequency of profit and loss events (at 50% thresholds)
• Timing of outcomes (including time to 50% win/loss and behavior up to expiration)
• Intraday and lifespan value paths
• Consistency across changing markets

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What the Backtest Does Not Measure

Limitations (not measured):

• No guarantee of future performance
• Does not predict market direction or discretionary decisions
• Ignores trader psychology or execution error
• Does not eliminate trading risk

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Why Methodology Transparency Matters

Results are only as meaningful as the methodology used.
This document ensures:

• You know exactly how results are created
• You can evaluate the realism and rigor of the process
• You have context to interpret results responsibly

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The BigDipperOptions Philosophy

Success is built on:

• Consistency
• Discipline
• Defined risk
• Structured decision-making

Backtesting helps understand system behavior, not predict the future or promise profits.

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Summary

• Spreads are selected once daily at 10:00 AM (New York)
• Duplicates removed for consistent evaluation
• Minute-level data tracks spread value continuously until expiration
• Outcomes are recorded at pre-set 50% profit and loss thresholds, with all value data retained until spread expiry
• Results reflect systematic, disciplined risk management and realistic tracking over three months

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What’s Next? Upcoming Reports and Deeper Analysis

The next phase goes beyond methodology—BigDipperOptions is releasing deeper reports from the three-month, minute-level spread data. These detailed analyses help answer key trading questions, including:

• What is the optimal hold period?
  Explore how win-rate and risk-adjusted returns change with different holding times—from intraday to expiration—for each spread type.
• How do spreads respond to market volatility and flow?
  Investigate how strategies perform under different regimes of implied volatility, vega, and gamma exposure.
• Is there a correlation between spread performance and option Greeks?
  Detailed analysis on vega/gamma sensitivity (and more Greeks) helps reveal which conditions drive profitability or risk.
• Can machine learning uncover new predictive factors?
  Early results show probability, moneyness, and volatility edge as strong drivers—next reports dive deeper.

Stay tuned for:

• Quantitative hold period analysis
• Vega/gamma and Greek risk correlation findings
• Real-world risk/reward pathways
• Expanded risk management insights

These upcoming reports are designed to help traders not just see how spreads performed, but why—and what parameters most consistently drive success.

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