What is the best option to trade on Microsoft?

What is the best option to trade on Microsoft?

We find the best option strategy to trade Microsoft [Backtest study]

What is the best option to trade on Microsoft?

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In our latest study, we put an MSFT naked short-put trade to the test with an expiration of 30 days. By the way, this is a strategy that we trade for ourselves regularly. We conducted the study over six months, with over 100 occurrences for each scenario. To gain a comprehensive understanding of the trade, we tested several adjustments.

The basic trade consisted of a Naked PUT on MSFT with an expiration of 30 days. Here is the summary of the baseline trade:

  • Naked short Put
  • Symbol: MSFT
  • DTE: 30 days
  • Delta: 10,16,30,40 and 50
  • Trade frequency: Place a trade every day over the last six months. For a total of 100+ occurrences.

Early exits:

  • 50% of the maximum profit
  • 12 days before the expiration
  • With a Stop loss of 200%
  • Baseline; trade to expiration

Held to Expiration

Let's look at the baseline, running the test at a different delta but with no adjustments, holding the trades to expiration. As expected, we can see that returns increase as we get close to the money-larger Delta. By looking at this information, one will be tempted to go for the 50 Delta trade, which delivers the greatest return ($499 average P/L). But look at the risk as presented by the standard deviation - an accepted proxy for risk. Clearly, that high P/L of the 50 Delta trade comes at great risk. So the question is if can we improve the trade by adjusting and closing the positions early, before expiration, and retain the maximum profit while also limiting the risk.

When we close the positions if they reach 50% of maximum profit, we see the total P/L decrease as expected, but the average per day profit increases substantially. We particularly like the profit per day indicator, because it tells us about the "intensity" of the trade. Remember a Put is like an insurance policy, you want to minimize the time you are insuring somebody else risk. So, the less time you held your position the better.

Charts > Green: returns ratio / Red: risk ratio / Orange: Sharpe ratio

A better yardstick

To make valid comparisons, we must determine a reasonable metric to effectively measure the strategy's success. We recognized that the two primary performance indicators in trading are risk and return, we can use the Sharpe ratio to evaluate the risk-adjusted returns of the options trading strategy. The Sharpe ratio is a widely used measure that considers the risk taken to achieve a certain level of return, allowing for a more accurate assessment of the strategy's performance. 


The table below shows the different scenarios and their outcomes over the last six months. It is interesting to note that based on the risk-adjusted returns, it's the 16 Deltas Put with an early exit if the position reaches 50% of the maximum profit that delivers the winning strategy. 

Charts > Green: returns ratio / Red: risk ratio / Orange: Sharpe ratio


Here is the link to the winning strategy backtest

Disclosure: The information contained in this article is intended for educational purposes only and should not be considered as investment advice. Options trading involves inherent risks, and it may not be suitable for everyone. It is essential to conduct thorough research and seek advice from a qualified financial advisor before making any investment decisions. We do not guarantee the accuracy or completeness of the information presented in this article, and we accept no liability for any losses incurred as a result of using the information contained herein.