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It would be very nice to have an AB module that handles options quotes and
pricing. But backtesting with real time option price data is almost
impossible.
Assume XYZ has closed for the day. XYZ's closing price is 100.00. It is
September. The closing price of the December 110 call is 3.50. If XYZ is
an active stock and has active options trading, then that call probably
traded at or near the close and its quoted price is representative. But, if
XYZ is not actively traded or the December XYZ 110 call is not actively
traded, the last call traded may have been several hours prior to the close
when XYZ was trading at, say, 98 or 102. In that case the quoted price is
not representative. But in our backtesting, we would have no way of
knowing.
Even with an active stock, some of the away-from-the-money options will be
thinly traded and their closing prices will not be accurate.
Couple this with the large number of options for each underlying and the
data collection, data cleaning, and data handling problem becomes very
difficult.
Use of an algorithm to estimate options prices is much easier to manage,
even though none of the resulting options prices are actual trades.
Thanks,
Howard
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