TRIED & TRADED
← Field guide · what a strategy is

What is a specification?

  • A specification is what turns a name into something testable.
  • For a credit spread it is four numbers, and leaving any one out means two people run different strategies.

The four numbers

NumberWhat it setsWhat happens if you leave it out
DeltaHow far from the money you sellThe most commonly stated one, so this rarely happens
TenorHow many days you give itAlso usually stated
WidthHow far apart the strikes are — and therefore the maximum lossYour software picks one, and you never chose it
Minimum creditThe least you will accept for that riskYou take whatever is offered, including trades that were never worth it
  • Delta and tenor describe where the trade sits.
  • Width and minimum credit describe what it is worth.
  • The first two get quoted constantly and the last two almost never — which is why so many published results cannot be reproduced.

Why the last two matter as much as the first two

Take the spread this site uses as its worked example: sell the 95 put, buy the 90, 45 days out. Two of the four numbers are in that sentence.

  • The width is $5, which is what makes the maximum loss $407 rather than something else entirely.
  • The credit is $93, and if you would have taken the same trade for $40 you are running a different strategy with the same name.
  • Width and credit together are the risk-to-reward. Neither one alone tells you anything.
  • A trade at 16 delta and 45 days can be excellent or pointless depending entirely on those two.

The specification is more than four numbers

  • The universe. Which names it may trade, and how they were chosen.
  • The period. Which history, and which part is held back.
  • The exit. All of it — see the seven ways out.
  • The costs. What is assumed for the spread crossed and the commission paid.
  • Stated before the run, not after it. That last word is the one that does the work.

Where it bites

A result without its specification is not a result. It is an anecdote with a number in it.

  • You cannot reproduce it.
  • You cannot compare it with anything else.
  • And you cannot tell whether the number came from the idea or from a setting nobody chose.

Written before, or it does not count

  • A specification written after the run is a description of what happened to work.
  • Run twenty variations and publish the best one, and the specification is fitted to the answer.
  • Which is why this site publishes the number of variations tried, alongside the result.

Common questions

Why four numbers and not three?

Because width and minimum credit together are the risk-to-reward, and a strategy quoted without them cannot be priced. Delta and tenor alone describe a location, not a trade.

Does every structure need four?

The four are the credit-spread set. A covered call needs the call's delta, the tenor and the assignment rule; a calendar needs both expiries. The principle is the same: name everything that changes the trade.

What if I do not use a minimum credit?

Then that is your specification and it should be stated. “No minimum” is a legitimate choice; leaving it unsaid is not.

Is the exit part of the specification?

Yes, and it is the part most often left out. It moves the result more than the entry does.

How this shows up in our tests

Every test on this site prints its specification above the numbers — all four numbers, the universe, the period, the exit and the cost assumptions.

No result is published yet. The specifications are already there, written before the runs, which is the only order in which they mean anything.

The warning

A default is not
an instruction

Related

The seven ways
to exit

The method

What is a
backtest?