Options Backtester

Simple backtester to evaluate and analyse options strategies over historical price data.

• Requirements
• Setup
• Usage
• Recommended Reading
• Data Sources

Requirements

• Python >= 3.6
• pipenv

Setup

Install pipenv

$> pip install pipenv

Create environment and download dependencies

$> make install

Activate environment

$> make env

Run Jupyter notebook

$> make notebook

Run tests

$> make test

Usage

Sample backtest

You can run this example by putting the code into a Jupyter Notebook/Lab file in this directory.

import os
import sys

BACKTESTER_DIR = os.getcwd()
TEST_DATA_DIR = os.path.join(BACKTESTER_DIR, 'backtester', 'test', 'test_data')
SAMPLE_STOCK_DATA = os.path.join(TEST_DATA_DIR, 'test_data_stocks.csv')
SAMPLE_OPTIONS_DATA = os.path.join(TEST_DATA_DIR, 'test_data_options.csv')

from backtester import Backtest, Stock, Type, Direction
from backtester.datahandler import HistoricalOptionsData, TiingoData
from backtester.strategy import Strategy, StrategyLeg

First we construct an options datahandler.

options_data = HistoricalOptionsData(SAMPLE_OPTIONS_DATA)
options_schema = options_data.schema

Next, we'll create a toy options strategy. It will simply buy a call and a put with dte between $80$ and $52$ and exit them a month later.

sample_strategy = Strategy(options_schema)

leg1 = StrategyLeg('leg_1', options_schema, option_type=Type.CALL, direction=Direction.BUY)
leg1.entry_filter = (options_schema.dte < 80) & (options_schema.dte > 52)

leg1.exit_filter = (options_schema.dte <= 52)

leg2 = StrategyLeg('leg_2', options_schema, option_type=Type.PUT, direction=Direction.BUY) 
leg2.entry_filter = (options_schema.dte < 80) & (options_schema.dte > 52)

leg2.exit_filter = (options_schema.dte <= 52)

sample_strategy.add_legs([leg1, leg2]);

We do the same for stocks: create a datahandler together with a list of the stocks we want in our inventory and their corresponding weights. In this case, we will hold VOO, TUR and RSX, with $0.4$, $0.1$ and $0.5$ weights respectively.

stocks_data = TiingoData(SAMPLE_STOCK_DATA)
stocks = [Stock('VOO', 0.4), Stock('TUR', 0.1), Stock('RSX', 0.5)]

We set our portfolio allocation, i.e. how much of our capital will be invested in stocks, options and cash. We'll allocate 50% of our capital to stocks and the rest to options.

allocation = {'stocks': 0.5, 'options': 0.5, 'cash': 0.0}

Finally, we create the Backtest object.

bt = Backtest(allocation, initial_capital=1_000_000)

bt.stocks = stocks
bt.stocks_data = stocks_data

bt.options_strategy = sample_strategy
bt.options_data = options_data

And run the backtest with a rebalancing period of one month.

bt.run(rebalance_freq=1)

0% [██████████████████████████████] 100% | ETA: 00:00:00
Total time elapsed: 00:00:00

The trade log (bt.trade_log) shows we executed 6 trades: we bought one call and one put on 2017-01-03, 2017-02-01 and 2017-03-01, and exited those positions on 2017-02-01, 2017-03-01 and 2017-04-03 respectively.

The balance data structure shows how our positions evolved over time:

• We started with $1000000 on 2017-01-02
• total capital is the sum of cash, stocks capital and options capital
• % change shows the inter day change in total capital
• accumulated return gives the compounded return in total capital since the start of the backtest

bt.balance.head()

Evolution of our total capital over time:

bt.balance['total capital'].plot();

Evolution of our stock positions over time:

bt.balance[[stock.symbol for stock in stocks]].plot();

More plots and statistics are available in the backtester.statistics module.

Other strategies

The Strategy and StrategyLeg classes allow for more complex strategies; for instance, a long strangle could be implemented like so:

# Long strangle
leg_1 = StrategyLeg('leg_1', options_schema, option_type=Type.PUT, direction=Direction.BUY)
leg_1.entry_filter = (options_schema.underlying == 'SPX') & (options_schema.dte >= 60) & (options_schema.underlying_last <= 1.1 * options_schema.strike)
leg_1.exit_filter = (options_schema.dte <= 30)

leg_2 = StrategyLeg('leg_2', options_schema, option_type=Type.CALL, direction=Direction.BUY)
leg_2.entry_filter = (options_schema.underlying == 'SPX') & (options_schema.dte >= 60) & (options_schema.underlying_last >= 0.9 * options_schema.strike)
leg_2.exit_filter = (options_schema.dte <= 30)

strategy = Strategy(options_schema)
strategy.add_legs([leg_1, leg_2]);

You can explore more usage examples in the Jupyter notebooks.

Recommended reading

For complete novices in finance and economics, this post gives a comprehensive introduction.

Books

Introductory

• Option Volatility and Pricing 2nd Ed. - Natemberg, 2014
• Options, Futures, and Other Derivatives 10th Ed. - Hull 2017
• Trading Options Greeks: How Time, Volatility, and Other Pricing Factors Drive Profits 2nd Ed. - Passarelli 2012

Intermediate

• Trading Volatility - Bennet 2014
• Volatility Trading 2nd Ed. - Sinclair 2013

Advanced

• Dynamic Hedging - Taleb 1997
• The Volatility Surface: A Practitioner's Guide - Gatheral 2006
• The Volatility Smile - Derman & Miller 2016

Papers

• Volatility: A New Return Driver?
• Easy Volatility Investing
• Everybody’s Doing It: Short Volatility Strategies and Shadow Financial Insurers
• Volatility-of-Volatility Risk
• The Distribution of Returns
• Safe Haven Investing Part I - Not all risk mitigation is created equal
• Safe Haven Investing Part II - Not all risk is created equal
• Safe Haven Investing Part III - Those wonderful tenbaggers
• Insurance makes wealth grow faster
• Ergodicity economics
• The Rate of Return on Everything, 1870–2015
• Volatility and the Alchemy of Risk

Data sources

Exchanges

• IEX
• Tiingo
• CBOE Options Data

Historical Data

• Shiller's US Stocks, Dividends, Earnings, Inflation (CPI), and long term interest rates
• Fama/French US Stock Index Data
• FRED CPI, Interest Rates, Trade Data
• REIT Data