A call option is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specified time frame.
One of the most common indicators of overbought or oversold conditions is the Relative Strength Index (RSI) indicator.
- First, login to the OptionStack platform. Select “New Strategy” from the “File” menu item
- Enter any arbitrary name you would like for the strategy
A visual strategy template will be automatically created for you. You can modify this template to define your trading rules.
- Define which stock you would like to trade. In this example, we will use the NDX (Nasdaq 100).
- Define the Relative Strength Index (RSI) on the NDX security. In this example, we will use a 14-period RSI.
- We can plot the RSI to visualize the entry / exit points.
- Define a rule to check when the Relative Strength Indicator (RSI) crosses below 30.
- Determine which option strategy to apply when RSI crosses below 30.
- In this example, we will buy call options when RSI crosses below 30.
- Define which call option to buy using the Visual Option Spread Builder tool.
- In this example, we will first look for out-of-the-money calls with Delta between 10 – 25 and Days To Expiration between 20 – 60 days.
- Determine how many call options to buy.
- There are several options to calculating the position sizing, such as quantity, cost, margin, risk, delta, etc.
- In this example, we will size based on cost, where we will purchase a quantity equal to about $10,000 in cost.
- Now that we have defined our model, we are ready to conduct our backtest.
- Before we run the backtest, first review the Backtest Settings.
- Once you have reviewed the backtest settings, click “Run Backtest”
- Now, let’s define the rules to adjust the trades when our profit target is reached.
- Specifically, let’s close the call options if the trades make 150% or greater return on investment.