Back-Testing My Own Trades: Let the Clucking Begin

A lot of hens clucking about the same topic at the same time can lead the observer to conclude that they are stomping around in a hen house of confusion. This goes for stock market enthusiasts, as well as any other topic. Bulls and Bears will stand on their pulpits shouting that they know the secret to successful investing, only to prove over time that they know little. They are either fools or gurus. Usually a little of both.

At the time this is being written, I don't know which category my predictions fall into, whether fool-hearted ramblings or clever bits of wisdom. Time will tell. This is meant to be section 1 of back-testing my trading strategies.

In my February 28, 2011 post titled "Bank of America Covered Calls Look Good," I suggested that Bank of America (BAC) stock would trade side-ways in the near term as issues in the housing market are worked out. I suggested selling the April 2011 $15 call option against shares owned outright. It appears that I was half-right about my prediction, Bank of America didn't shoot higher. However, on April 15th, shares closed at $12.82, which is about $1.14 below this trade's break-even price of $13.96. The holder of Bank of America shares reduced their loss by selling the calls, but would have done better to simply sell the shares and buy back at the end of the term. This trade would have resulted in an 8% loss.Verdict: Foolish

On March 6, 2011, I recommended three trades based on Jim Cramer's Lightning Round.

The first trade was a naked put position on American Express (AXP). I recommended selling the April 2011 $43 put for $1.29. Since the stock traded over $43 at expiration, the entire $1.29 put premium would have been a profit. The profit on this trade was about 3% over the few days before expiration. Annualized this trade would result in a 26.7% return on your money.
Verdict: Clever

The second trade was a covered call position on Weatherford International Ltd. (WFT). The stock was trading for about $20.59 and I recommended selling the in-the-money $20 April 2011 call for $1.51. As long as the stock traded above $20 at expiration, you would automatically sell your shares and receive a profit. The shares indeed traded over $20 at expiration. So, this trade would have netted 4.46% over 41 days, or 39.7% annualized.
Verdict: Clever

The third trade was a bull call calendar spread on Boeing Co. (BA). This trade involved buying a long-term in-the-money call option and selling a short-term out-of-the-money call to generate cash income. I recommended buying the $55 January 2013 Call option and selling the $75 April 2011 call. The stock closed at $72.60 on April 15th, meaning that you would have been able to keep the entire April call premium of $1.08 per share without being obligated to sell shares. Meanwhile, the $55 January 2013 in-the-money call continues to appreciate with the current stock price over $76. The current bid price on the $55 call is $23.20 and the net cost of the call was $19.52 ($20.60 price of long-term call minus $1.08 profit from short-term call sale). This trade has resulted in a 18.85% profit thus far, over 53 days. Annualized, this is a 129% profit.
Verdict: Clever


Well, so far, I am fairly pleased with my results. These results show the benefit of diversification. Imagine if the Bank of America trade was the only trade I made two months ago. I might be ready to hang up my towel. Please, keep reading, as I plan to back-test the rest of the recent trades and see where we ended up.