Selling a put is a strategy where an investor writes a put contract, and by selling the contract to the put buyer, the investor has sold the right to sell shares at a specific price.
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 template will be automatically created for you. You will modify this template to define your trading rules.
- In the IDE, define which stock you would like to trade. In this example, we will use the NDX (Nasdaq 100).
- Select 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.
- Select the 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 sell put options when RSI crosses below 30.
- Define which put option to sell using the Visual Option Spread Builder tool.
- In this example, we will sell out-of-the-money put with Delta between 20 – 35 and Days To Expiration between 20 – 45 days.
- Determine how many put options to sell.
- There are several ways to calculating the position sizing, such as quantity, cost, margin, risk, delta, etc.
- In this example, we will size based on credit received, where we will sell a quantity equal to about $10,000 in credit received.
- 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 trade when certain market conditions are reached.
- Specifically, let’s close the trade when it has reached 80% of its maximum profit.