How to use the ThinkorSwim’s Backtesting Tool

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Video Transcript:

Hello, traders. Welcome to the thinkorswim tutorial and the fifth module, Analyze That. In this lesson, we’re going to learn how to use the thinkBack. And the thinkBack can be found under the Analyze tab on the thinkorswim platform. And this is actually a backtesting tool for options, and thinkorswim has over a decade in option data for you to backtest on it. And what you’re going to do here is place backtrades and see what profit or loss would have occurred as the option matures.

ThinkBack Backtesting Analysis Tool
So the first thing we’re going to do is enter a symbol here on the box at the top left side of the thinkBack, and we are going to choose to look at Tesla on the weekly options. After you do that, you have to choose the date on which you want the data to be at. As you can see, we are…today’s date is September 14, 2015, but on the thinkBack tab we are at February 12, 2015. To change the date, just click on this calendar, and choose the date from the calendar that pops out. Now, that we are at the date that we are interested to look at, let’s create backtests or backtrades to look at what would have happened on different situations.
The first thing you want to do is open one of these options to look at the calls and the puts that existed on February 12. You can see on this side the calls and you can see on this side the puts, or the put options. Now, to create a backtrade is easy. You would just have to click on the ask side of the market to create a buy trade either on a call or on a put or click on the bid side of the market to create a sell trade on a put or on a call.

Backtesting tool ThinkorSwim
Now, because we don’t sell naked calls or puts, we are going to create a buy trade on a call on February 12. Now, you just have to choose the option, and click on it. We are going on click on this one, and create a backtrade. And now, we have created a backtrade of 10 call options on February 12 at 5675. You can choose to customize this entire backtrade submenu just by clicking up here and clicking on Customize, and like that, you can add a column, delete a column or move up and down to change the aspect of the backtrade window.
So the first thing you need to notice is that the open P&L on the backtrade window. You can see that the trade date was on February 12, and the P&L date right here is on the same date. And if you look at the chart, you can see that you have the historic price action chart on Tesla for a given period of time, and you have a horizontal line giving you the entry or the option price that you bought or the call option that you bought. Now, you bought that option on February 12, so we are going to look at the P&L on February 14. You can see that the P&L is now negative $275 for a 10-call option trade that we made two days ago.
If you continue to move forward, you will see that the GICS change, but the P&L, well, it also changes. Now, we are at negative $650, so it wasn’t a very good idea to buy this weekly options or this weeklies for a very short time trade.
Now, let’s move forward, and let’s see what happens next. Now, if we move forward five days in time, you can see that the P&L or the open P&L for February 20 is actually $5600. So this trade or this specific trade on a weekly basis was a good idea and a good setup. But if we continue to look at the specific P&L for the same option, you can see that, well, it dropped or the P&L drops drastically after a while so you can look at whether the trade was or this particular trade was profitable, but you can also look to where this trade was the most profitable, and where you would have had to close it. And by backtesting this way, you can also, well, improve your trading strategy or your option trading strategy.

Adam

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