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Good post Howard.
In addition, options are hard to backtest from traded or closing prices because of the very wide bid/ask spreads that could amount from 1% to 50% depending on the price and volume. I think it only makes sense to test from historical bid and ask prices. However, I don't even know if that data is available. Using theoretical prices can not account for this nor the wild fluctuations in IV that are unpredictable. Aside from the obvious leverage, It is those wild variations that create the greatest opportunities in option trading.
Dennis
On Aug 9, 2007, at 9:34 AM, Howard B wrote: Greetings --
It is difficult to work with options historical data.
For one reason, a single tradable, such as IBM stock, has dozens or hundreds of options associated with it at any time, and as options are created and expire the tickers for those options appear and disappear. Maintaining that database is complex and expensive, and making reference to it during backtesting is complex.
For another reason, even assuming that you have an options database and methods for working with it, even given a single options contract and its underlying, there is uncertainty synchronizing the price quotations. IBM may have closed at 110 on a given day after having traded in a range of 108 to 112. The options close to 110 in strike price and close to expiration may be very actively traded, and the closing price listed for those options may represent the options trades near the close when IBM was near 110. But options further from the strike price and further from expiration are less actively traded, and the closing price listed for those options may represent trades made much earlier in the day when IBM was at a different price -- if no trades for those options are made later in the day, those earlier trades are still listed as Closing.
While the options pricing formulas are not perfect, they are at least consistent. You might consider using theoretical prices computed on-the-fly using, say, Black-Scholes, rather than historical prices.
Thanks,
Howard
On 8/7/07, cmaiman <cmaiman@xxxxxxxxx> wrote: Hi,
I have read the tutorials, but I don't recall seeing anything related
to these questions:
1 - Is it possible to specify two (or more) distinct (and hopefully
uncorrelated) trading systems in AmiBroker so that I can backtest how
the combination performs?
2 - While I don't plan to do options trading for a while, is it
possible to backtest an options trading strategy? Seems like
backtesting an options strategy would require a tremendous amount of
historical data because there are so many options (is it even available?).
Thanks!
Craig
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