> ## Documentation Index
> Fetch the complete documentation index at: https://docs.bigdipperoptions.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Backtest methodology

## 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.

***

## 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.

***

## 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.

***

## Profit & Risk Thresholds

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

### Profit Target

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

### Risk Threshold

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

***

## 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.

### Recorded Outcome Table

| Outcome    | Description                              |
| ---------- | ---------------------------------------- |
| 50% Profit | Spread hit profit target                 |
| −50% Loss  | Spread hit risk threshold                |
| Expiration | Neither threshold reached, trade expired |

***

## Example Outcome Records

| Spread           | Entry Date   | Target Hit Date | Value Reached | Outcome        |
| ---------------- | ------------ | --------------- | ------------: | -------------- |
| Bear Call Spread | Jan 14, 2025 | Jan 19, 2025    |          +50% | Profit Target  |
| Bull Call Spread | Feb 3, 2025  | Feb 3, 2025     |          −50% | Risk Threshold |
| Bull Call Spread | Mar 1, 2025  | Mar 15, 2025    |          +11% | Expiration     |

***

## 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

***

## 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.

***

## 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

***

## 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

***

## 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

***

## 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

***

## 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

***

## 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.

***

## 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

***

## 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.

***