To see the origin of this series click here.
I've been tracking this strategy for ~7 weeks now and it appears to have substance. To summarize, the strategy calculates a SKEW measure using ATM calls and OTM puts for a collection of ETF symbols. It then sorts the symbols into quintiles based on the SKEW metric.
Using daily close/close return calculations for this strategy has shown exceptional performance as can be seen here. However, translating a successful daily strategy with no transaction costs and perfect trading fills into a robust strategy that can execute and perform well after incorporating the real structure of market trading is a difficult task. In some cases the strategy cannot survive this translation.
In order to test the viability of this strategy I used the Quantopian platform, which allows event-based point-in-time simulated trading on real market data. It also allows us to model transaction costs and slippage which can have large impacts depending on the strategy.
The following backtest is a variation on the original strategy proposed in the series. This strategy uses the top/bottom SKEW quintiles and goes long/short each ETF respectively. The portfolio size is $100K USD. The holding period is one week. It buys/shorts the stocks 30 minutes prior to the market close on the first trading day of the week and liquidates previous holdings on the first trading day of the week 5 minutes after the market opens.
Thus far, even after incorporating realistic trading costs the performance is intriguing to say the least.