Options software for backtesting?

[rapidex]

Can anyone recommend software for backtesting option strategies that doesn't cost anything?

$4k is a lot for something like optiongear for someone who isn't yet trading options?

It looks like you need some sofisticated software to get started. Any suggestions?

 

[sails]

Rapidex, I don't think any free backtesting software exists for options. I was also hoping someone may have replied with some interesting information!

Of the paid ones, Optionetics have (or used to have) Platinum, but I believe that only works on US stocks. I think OptionVue has some backtesting abilities, but cost wise would be comparable to OptionGear.

I have read on other boards that OptionGear may only work if you pay for their data. From what understand, if you don't renew the data subscription each year, the software hangs.

Personally, I use the Hoadley Options Strategy Evaluation Tool for backtesting. Everything is done manually, so it's slow, very cumbersome but reliable.

You may already know of it, but one the good things is that the basic tool is free. If you do pay for 12 months downloads to get the paid features (currently $99), you can continue to use the spreadsheet after the 12 months is up - you just can't download the latest updates after that time. There are heaps of demos and information on the site http://www.hoadley.net/options/strategymodel.htm

Cheers

 

[rapidex]

Thanks Sails. I've taken a look at Hoadley's - I'm aiming for something that doesn't require all the manual input, however it could be something I can use until the training wheels come off (considering it's only $99)

Yes Platinum only works with US stocks, but since that's all I'm interested in trading, it could be an option.

Cheers.

 

[VolatilitySmile]

Sails, you wrote that you have been using Hoadley's OSET for backtesting but could you please explain where are you getting the historical options data from. Thanks.

 

[sails]

Sails, you wrote that you have been using Hoadley's OSET for backtesting but could you please explain where are you getting the historical options data from. Thanks.

VS, I see this is your first post - welcome to ASF!

I really only use the Hoadley tool to work out theoretical historical prices by just plugging in the IV + stock price for that period of time together with any other relevant details for the option trade (buy/sell - put/call - qty - date of trade - date of expiry). I also make sure the risk free rate is correct and if American style options, I have the pricing model set to "Binomial American".
I currently get historical IV from WebIress.

I then use a spreadsheet to record the prices (adjusting a little for slippage). Very slow and tedious - but I find it workable especially if backtesting monthly type trades and I've usually found Hoadley's pricing to be extremely close to live market quotes with the correct IV plugged in - so I feel reasonably confident with it's accuracy.

I did look at some software that was capable of a more automated style of backtesting Oz options, but was concerned with the accuracy of their data.

I must say though, backtesting this way taught me heaps about how options work - particularly the effect of fluctuating IV levels.

Cheers

 

[VolatilitySmile]

Hi sails, thanks for the welcome.

You didn't specify if you were doing Australian or US options. I have been dealing only with US options for several years. I also use Hoadley for testing strategies and Interactive Brokers for trading. Three months ago I started collecting my own historical options data for the three ETF I was interested in (IWM, SPY, and DIA). They have strikes on dollar intervals and you can try many different strategies.

There are several US sites offering daily option quotes. I am using quote.com and every day I archive the option pages for IWM, SPY and DIA.

Mozilla Firefox has an add-in called Scrapbook that you can use to save web pages and it is very easy and convenient to use. You can use it to make a collection of the everyday option pages of your favorite US stocks. It is really convenient to be able to go back into the past and look up option contracts which have already expired. I will be happy to answer any questions about Scrapbook.

Cheers

 

[sails]

Hi VS,

Thanks for the info on the Scrapbook. I only trade Aus options and download front month option info each day for the dozen or so stocks that I trade into excel to keep an eye on open interest and volume levels. The download does include price, so I have used these for backtesting on occasions if I'm only testing front month strategies. Still need Hoadley to calculate prices for anything past that front month.

I trade the Aus market rather than the US as I'm fairly active with my trading and like to sleep at night!

Sounds like you have been with IB for some time - how have you found them for options trading?

Cheers

 

[VolTracker]

Hi All,
If your handy with VBA & Excel and just want to get a rough idea of how a strategy would go using closing price data, you can model it using black & scholes with say a 20 or 30 day historical vol as a proxy for IV. It works reasonably well as a rough guide although you need to watch out for dividends, earnings & other vol events. It is a lot of work but it is possible.
You can then simulate any sort of TA or FA system on the underlying around it.

 

[VolatilitySmile]

Hi,

1) Regarding my opinion about Interactive Brokers I am really puzzled why so many people have doubts about using them. Their commissions are $0.75 per option contract ($0.50 for 0.05 to 0.10 premium, and $0.25 for less than 0.05 premium), no min charges per trade and no charges for option exercise. Don't believe anyone who is telling you that commissions do not matter that much. In the long run high commissions can kill you. When I first saw the commission charges of the Australian brokers I knew that I was not going to trade Australian options. IB Trader Workstation is reliable and after you learn how to use it you will not have any problems.

2) VolTracker I am afraid that I am missing your point. The modeling that you are suggesting can be very easily done using Hoadley's Option Strategy Evaluation Tool. The problem is that often theory and reality do not match when using volatility dependent strategies. Also I am not sure what period for historical volatility is the most appropriate. For instance at the moment the 30 day HV for IWM is around 30 (reflecting the recent turmoil in the market) while normally it is around 15. Obviously when the market calms down the volatility will also go down.

3) There is an interesting article regarding theory and practice at http://www.ederman.com/new/docs/euronext-volatility_smile.pdf called Laughter in the Dark - The problem of the Volatility Smile by Emanuel Derman.

 

[VolTracker]

Thanks for the link VolSmile. I agree, options are slippery slimy things to model, and often the market doesnt respect my model. Perfection is not possible but I still find modeling thru time is a useful exercise in terms of seeing how positions and risk change with time and price. Even something as simplistic as BS gives you a big head start on no model at all, as long as you know it has limitations.
Not sure whether 20 or 30 trading day HV is best proxy for IV, I tend to use historical asx IV data, even then lack of liquidity and greedy MM's make it hard to implement many strategies that test well.

 

[sails]

Hi,

1) Regarding my opinion about Interactive Brokers I am really puzzled why so many people have doubts about using them. Their commissions are $0.75 per option contract ($0.50 for 0.05 to 0.10 premium, and $0.25 for less than 0.05 premium), no min charges per trade and no charges for option exercise. Don't believe anyone who is telling you that commissions do not matter that much. In the long run high commissions can kill you. When I first saw the commission charges of the Australian brokers I knew that I was not going to trade Australian options. IB Trader Workstation is reliable and after you learn how to use it you will not have any problems. ....

Thanks for the reply, VolatilitySmile. I'm in the process of opening up an account, so was just interested in your opinion as you mentioned that you were with them. There have been some negative experiences posted lately, but I know IB has a large customer base pretty much world wide, so I'm sure they do a lot right. Looking forward to trading with them and using their platform which sounds great!

 

[Blumoontrader]

HAve a look at www.samoasky.com ... It can be set up to download Australian Option chains.



BlumoonTrader

 

[RichKid]

This is a very pleasant and productive thread, congrats to all concerned for sharing multiple viewpoints in a professional and helpful manner.

Big Warm ASF Welcomes to VolatilitySmile, Blumoontrader and VolTracker, I hope you find your time here enjoyable. Sails and WayneL are just a couple of the keen options traders on ASF, many more are sure to enjoy your company as things progress.

 

[nizar]

This is a very pleasant and productive thread, congrats to all concerned for sharing multiple viewpoints in a professional and helpful manner.

Big Warm ASF Welcomes to VolatilitySmile, Blumoontrader and VolTracker, I hope you find your time here enjoyable. Sails and WayneL are just a couple of the keen options traders on ASF, many more are sure to enjoy your company as things progress.

Brother I havent seen you online for ages!
Hows your trading going?

 

[RichKid]

Brother I havent seen you online for ages!
Hows your trading going?

Geez, it's cozy in here isn't it? didn't realize I'd been missed! The trading front is quiet- which is just brilliant! (managed to cut down over-trading and follow longer trends now)...just observing how markets trend and studying trading texts, simplifying things all the time. Have posted odds and ends but not much. Will be back in force at some stage in the future.

All the best with your trading in the meantime, glad to see you've got a snazzy looking trend following blog going there, keep on testing and thinking, the way to go.

PS will have to take a sabbatical again to learn the ins and outs of options via ASF's threads of gold on eto's at some later stage. Wayne, Sails, Mag and others have posted many brilliant thoughts on here.

Happy Trading!

 

[RichKid]

Hi,
............
..............
3) There is an interesting article regarding theory and practice at http://www.ederman.com/new/docs/euronext-volatility_smile.pdf called Laughter in the Dark - The problem of the Volatility Smile by Emanuel Derman.

mate, that's a nice article, thanks muchly...... but too high brow for me atm....now this one, off Derman's little shrine room, is a lot easier for my neanderthal brain to follow (if you thought WayneL's threads on greeks were seksy then there's more nerdy stuff on Derman's site): http://www.ederman.com/new/docs/risk-its_all_greeks_to_me.pdf.

 

[sails]

HAve a look at www.samoasky.com ... It can be set up to download Australian Option chains.



BlumoonTrader

Thanks for the link, Blumoon Trader - very nice
Somewhat mystified why it is free - someone has put a fair bit of work into it?

 

[howardbandy]

Greetings all --

There are a couple of problems that arise with backtesting options that are difficult to overcome.

As opposed to the single set of OHLCV data for the stock or future, there are many options open at any time, so there is much more data to handle. And, as with futures contracts, options series are created, live for a few months, then die.

Historical options data reports actual transactions. For a given option and a given day, the set of data is OHL"LT", not OHLC. LT is the price of the last trade. If an option is active, that may have occurred near or at the close and may be closely correlated with the closing price of the underlying. Or it may have occurred early in the session when the price of the underlying was much higher or lower than at the close. And there is no way of knowing (without time and sale data for both the underlying and the option) what the relationship was.

It is possible to use one of the options pricing algorithms to compute the options price for any given underlying price. But that requires using the volatility of the underlying to estimate the implied volatility of the option, which is one of the principle components of options price. And these may be very different. So different and so often different that one of the major options trading strategies depends on comparing the historical actual volatility of the underlying with the current implied volatility of the option and taking an options position expecting the two measures to revert.

Thanks for listening,
Howard

 

[wayneL]

Greetings all --

There are a couple of problems that arise with backtesting options that are difficult to overcome.

As opposed to the single set of OHLCV data for the stock or future, there are many options open at any time, so there is much more data to handle. And, as with futures contracts, options series are created, live for a few months, then die.

Historical options data reports actual transactions. For a given option and a given day, the set of data is OHL"LT", not OHLC. LT is the price of the last trade. If an option is active, that may have occurred near or at the close and may be closely correlated with the closing price of the underlying. Or it may have occurred early in the session when the price of the underlying was much higher or lower than at the close. And there is no way of knowing (without time and sale data for both the underlying and the option) what the relationship was.

It is possible to use one of the options pricing algorithms to compute the options price for any given underlying price. But that requires using the volatility of the underlying to estimate the implied volatility of the option, which is one of the principle components of options price. And these may be very different. So different and so often different that one of the major options trading strategies depends on comparing the historical actual volatility of the underlying with the current implied volatility of the option and taking an options position expecting the two measures to revert.

Thanks for listening,
Howard

Yup!

Waste of time IMO. (back testing that is)

 

[sails]

Greetings all --

There are a couple of problems that arise with backtesting options that are difficult to overcome.

As opposed to the single set of OHLCV data for the stock or future, there are many options open at any time, so there is much more data to handle. And, as with futures contracts, options series are created, live for a few months, then die.

Historical options data reports actual transactions. For a given option and a given day, the set of data is OHL"LT", not OHLC. LT is the price of the last trade. If an option is active, that may have occurred near or at the close and may be closely correlated with the closing price of the underlying. Or it may have occurred early in the session when the price of the underlying was much higher or lower than at the close. And there is no way of knowing (without time and sale data for both the underlying and the option) what the relationship was. ...

Yes, totally agree that trying to use historical options price charts for back testing could never fully replicate what really happened. It also doesn't help with the practical issues of being filled - i.e. the cost of slippage.

...It is possible to use one of the options pricing algorithms to compute the options price for any given underlying price. But that requires using the volatility of the underlying to estimate the implied volatility of the option, which is one of the principle components of options price. And these may be very different. So different and so often different that one of the major options trading strategies depends on comparing the historical actual volatility of the underlying with the current implied volatility of the option and taking an options position expecting the two measures to revert.

The closest I have come is to use something like the Hoadley OSET or Positions Manager and plug in IV levels for that day which can be found on historical WebIress charts or http://www.premiumdata.net/products/premiumdata/asx.php. Obviously, still doesn't fully replicate the conditions, but have found it helpful in gaining understanding of position management while being fully aware of it's limitations.

Of course, it doesn't take volatility skews into consideration and I'm not aware if anyone supplies such detailed historical information. And even then we can only guess at how much slippage there may be on each trade.

I also use the Hoadley tool to simply get an idea of how an option (or combos) may perform under different market conditions - this is where one can simulate skews, vary IV conditions, price, time, interest rates, etc. Personally, have found this to be quite an eye opener.

However, if I have to trade blind, I would prefer to make some attempt at partial sight - not sure if that's a good analogy, but it's what came to mind