System for backtesting

Discussion in 'Options' started by sumer, Apr 8, 2005.

  1. sumer


    I've been looking for an options backtesting system and the best solution I've found is platinum.

    But this product is slow and has lots of bugs (incorrect historical option data).

    Any better solutions?
  2. Consider using a standalone (!) stock analysis/backtesting program where you can import ASCII files, and use it to import eod options data from a data provider.
  3. MTE


    Have look at Option Gear at it might be what you're looking for.
    Btw, I'm not affiliated with them in any way, just heard there're ok.
  4. Anseld


    don't know what information you're specifically hoping to discover, but if it's pricing, then generally, backtesting option (prices) is not really that sensible.

    values for otm's may not seem that relevant nor appropriate, and the atm's adjust too erratically over any processed time series due to so many variables that easily make the backtestig model somewhat inefficient and overly dynamic.

    you might find greater reliability from the higher delta itm's, but if that's your objective, then you should just do it with the common.

    having a formed strategy which determines the path of the common and then applying option strategies later to that known model is probably a more functional approach.
  5. I agree! I remember reading in a book that 'option trading' is really 'volatility trading'. The biggest determinant of successful option trading is forecasting volatility. Set up a spread sheet that does the math for fair value, delta, gamma, theta, and vega/kappa. You will see that vega/kappa is the real profit driver of an option trading program. Over a series of trades the price you pay/receive in theta will be overwhelmed by the gamma exposure that looks so lucrative.

    IMHO, I believe that anyone trading options should read Chriss - 'Black Scholes and Beyond' - which has one of the best explanations of pricing theory.
  6. What do you mean? :confused:
  7. sumer


    I'm using volatility strategies and trying to improve them, by cheking past movements in particular stock and it's IV. Good backtesting could be really helpful.
  8. If you are trading options on securities that have a futures contract equivalent (es,nq,er2) then you can probably create synthetic option data for back testing purposes. But for trading options on individual stocks that are not super liquid, e.g. where market makers are the primary source of liquidity, it is virtually impossible to create synthetic prices.

    It has been my experience that during the first hour of trading 'market maker computers' can misprice some options. As then day goes on the MMs seem to sync up and pricing becomes more uniform. I have no empirical data to back this up, it is just something that I have occasionally observed. Can anybody explain why?
  9. Trajan


    Yeah, I think this is true, especially the opening after some sort of event. That wouldl be the time to get some trades off as people scramble to adjust. Option pricing is can often be the result of supply and demand, not just theoretical models. When I was on the floor, I always thought prices got f'ed up during the middle of the day when people were at lunch and the remaining people got lazy or lulled by the slow action.

    On the whole testing issue, a couple of points. End of day day data can often not present an accurate picture of the options. This is because price spikes in the underlying on the close can distrort valuation. Also, as John mentioned, the spread on the illiquid stocks could make it difficult to properly measure any system. In other words, would it be realistic to think that you could trade at some what attractive prices. Trading speads(not the difference between bid and ask, but a position with two or more options) could magnify this problem and probably should theoretically make most of them unprofitable, ie trading at the market could mean your buying a spread at a 60 vol while the stock is only a low 40. That is a ton edge and a reason why options which barely trade are listed, because there is so much profit on each trade.
  10. I was wondering if you could answer a question about the supply/demand aspect of option pricing by market makers. If a MM is bidding and is hit for 500 ATM calls, he will then (assuming the stock price does not change) lower his bid and possibly lower the offer on the ATM call.

    Now he has three ways to reduce/eliminate risk:

    #1. Sell the ATM options at a higher price
    #2. Sell approximate delta equivalent of OTM/ITM calls
    #3. hedge the long position with a synthetic short call (short stock + short put).

    So my question is if he can not immediately use #1 to reduce risk, will he be forced to change his bids/offers to implement hedging options #2 and #3? If so, would you be able to notice this for a less actively traded series of options?
    #10     Apr 11, 2005