Binary butterfly on news - backtest


#1

I have backtested binary strangle on news and wrote a post on the forum (Binary strangle on news - backtest). Like I said, i don’t master the volatility parameter used for evaluate the option prices (in Black Sholes formula). That makes the strangle backtest not enough relevant. I only have general results like very strong news (NFP, interest rate,…) are more likely profitable, on the 2010-2017 backtested period. And also it seems that using TP for exit is a good thing.

I found at first that strangle was the most obvious strategy to play, and applied to big news, it should always win. But I realize, after reading apex videos and articles, that it is not the case, and may be the reverse could be more profitable.

So now I am interested in testing binary butterfly on news (same data, backtest engine, period), on two hours forex binary contracts EURUSD, GBPUSD, USDJPY,…) : I like to see both ITM options gain as time passes by, I find it very relaxing, compare to the stress of seing the strangle going to zero, slowly but surely, when the surprise is not there. Of course, I still need to evaluate the prices with Black Sholes formula, and the results will be general too.

To guide the BT, if you have some informations about the following points.

  1. about the volatility : when a news is coming, how the implied volatility reacts : is it growing long time before the news (hours), or only few minutes ? And when is it decreasing after the news (5mn, 10mn, hours …) ?

  2. in the news calendar (http://apexinvesting.net/news-trading/ ) each tradable news has some stats (in the pop up). Sometimes, it is advisable to enter the butterfly soon. Whereas, in the same page , it is written something different : “Ideally the butterfly is entered about 20 to 5 minutes before the news is released to take advantage of the increase in implied volatility to allow you to trade a wider range.” What is the best ?

  3. about the exit Is it a good practice to set a TP (for example exit both legs, if the strike bought is over 95) or is it better to go to expiration (in that case I skip the evaluation price problem). Is it a good idea to set a stop loss, (some posts/videos talk about that : “if the market touches one of the 2 strikes, exit both legs with small loss.”. Is it a good idea to set that kind of SL systematically ?

  4. if you prefer trade the news with spread, why is that ? May be it will encourage me to backtest on spreads :wink: