Think Ahead by Looking Back: Using the thinkBack™ Tool for Backtesting Options Strategies

The thinkBack™ tool in thinkorswim® can help backtest options strategies. Compare strategies, run entry and exit scenarios, and become a more informed option trader. mirror: Backtesting options strategies
4 min read
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Key Takeaways

  • Learn how to use the thinkBack tool in thinkorswim® to backtest options strategies

  • Determine various profit and loss (P&L) scenarios and see simulated trades play out

  • Know the different ways to view P&L for simulated trades

When it comes to the stock market, history may not repeat itself. Yet, looking back in time and running “what-if” scenarios can be a valuable part of a trader’s practice. Taking this approach seriously could help in deciding specific entry and exit points and determining an outcome for past simulated trades. It may not guarantee future results, but this type of backtesting can help you evaluate the efficacy of certain trading rules or strategies.

Backtesting Options with Benefits

For stocks, backtesting is relatively straightforward. But for options trades, the process can be more difficult. Option traders sometimes refer to the chart of an underlying stock for entry and exit signals. However, the price that displays on a stock chart doesn’t tell you how an option is performing. So, using the stock chart could end up being insufficient. To complicate matters more, options trades may be made up of various legs that together make up a specific strategy. This could make determining a hypothetical profit or loss on a past trade more difficult.

The thinkBack tool on the thinkorswim platform gives you the opportunity to backtest options. With thinkBack, you can view historical options prices, practice virtual trades using various options strategies, and determine P&L scenarios.

How to Backtest Options on thinkBack

To access thinkBack, follow these steps:

  1. Select the Analyze tab on thinkorswim (see figure 1).
  2. Select thinkBack from the submenu.
  3. Enter the symbol of the underlying stock in the symbol box (top left).
  4. Enter the entry date for the simulated trade.
  5. In the field labeled P/L Date, enter the date you want to determine profit or loss for the trade. In figure 1, the P&L date is 7/15/2020—think of this as the date you’re exiting the options trade.
  6. The profit or loss for the trade is displayed in the P/L Open field in the lower right of the page.

Some traders may refer to a chart to do technical analysis of the underlying stock, but you can use whatever you typically do to determine entry points. When you enter a past date, the options price will adjust so you’ll see options that were available on that date. In the example in figure 1, notice the historic 2020 options are available to trade.

Go ahead and enter an options trade. For example, for a long call, select the ask price of a call option on the thinkBack option chain; for a short put, select the bid price of a put option. You can also create multi-leg options trades on thinkBack. The example in figure 1 displays a vertical spread.

FIGURE 1: BACKTESTING OPTIONS TRADES. The thinkBack tool on thinkorswim can help you study past price action, which in turn could be helpful in determining potential entry and exit points and different P&L scenarios. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.

Another way to view the chart of the underlying stock and the profit or loss of your simulated trade is to expand Underlying & P/L Graph at the bottom of the page (see figure 2) located below Backtrades. You’ll see the price chart of the underlying stock, its volume, and a yellow line that indicates the profit or loss for the options trade. To see any day’s profit or loss, hover your cursor over that point of the graph and you’ll see the end-of-day profit or loss value displayed above the graph. By viewing the yellow P&L line on the graph, you can see the historic trade unfold day by day.

FIGURE 2: A VISUAL GLANCE. You can also view the P&L of your simulated trades graphically. The yellow line displays the P&L for the trade. Chart source: The thinkorswim platform. For illustrative purposes only. Past performance does not guarantee future results.

The More You Know

The thinkBack tool can be a time saver compared with waiting for each options paper trade to unfold in real time on paperMoney®. When backtesting your options trades, you can compare strategies, run different entry/exit scenarios, and get a better understanding of options. Of course, past performance doesn’t necessarily indicate future results, but an informed trader may be better able to navigate the world of options—and thinkBack is a great tool to help you learn.

Getting comfortable with thinkBack requires a lot of practice. As with most things, the more you use it, the quicker you’ll be able to get the information you want from it. You never know, thinkBack may be that hidden gem that takes your options trading to the next level.


Key Takeaways

  • Learn how to use the thinkBack tool in thinkorswim® to backtest options strategies

  • Determine various profit and loss (P&L) scenarios and see simulated trades play out

  • Know the different ways to view P&L for simulated trades
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