Backtest Specific Options

The Backtest Specific Options interface allows you to run a backtest by selecting option legs that are available in the market today instead of entering rules that govern your strategy as in the Backtest Strategy interface. You can enter the option legs that you'd like to evaluate including their strike price and maturity date, and the Volatility Backtester automatically converts those option details into parameters to backtest historically over a decade or more of historical data. While the Backtest Strategy interface is primarily designed for evaluating systematic strategies with strictly defined rules that you optimize, the Backtest Specific Options layout is more geared towards one-off discretionary trades where you know which options you want to transact in but don't have systematic rules defined that you will trade repeatedly.

For example, it's much easier to use the Backtest Specific Options interface to evaluate the risk and reward of a single hedging trade where you're purchasing a specific put option. On the other hand, the Backtest Strategy interface would be better for evaluating a repeatable systematic strategy, such as selling put spreads every month.

Customize Your Specific Options Backtest

In the Customize Your Backtest section, enter the details of the options contracts that you are looking to backtest including their maturity dates, put or call types, quantities, and strike prices, and prices. You can add more option legs to your backtest by clicking the “+ Add Option” button, and you can remove options by clicking the red “Remove” buttons on the right of each option's row. You can enter any combination of options, for example, outright calls, put spreads, iron condors, etc. Use negative quantities for sold options and positive quantities for bought options. You can also add shares to your backtest, for example to evaluate covered call strategies.

Next, select your backtesting "Strategy Type". You can choose between whether you would like to understand how your trade may perform going forward if historical market moves repeat themselves (this is the "Use today’s pricing and historical moves" option) or how your strategy would have performed in the past if traded at historical prices (this is the "Use historical strategy pricing" option). The "historical strategy pricing" method is recommended if you’re evaluating systematic strategies in the Backtest Specific Options interface like selling puts every month. The “today’s pricing” method is recommended for discretionary, one-off, and personal decision-based strategies.

There are many additional options that are at your disposal to customize your backtest and to tailor it to your strategy. For example, you can enter an "Exit Date" to specify your holding period. If you were looking to hold a three month call option for only ten days, you would enter an Exit Date ten days from now. You can also enter profit targets and stop losses as either absolute dollar values or percentages of premiums and also include stop loss slippage. Furthermore, you can also customize your strategy to only be executed if implied volatility is within certain percentage or historical percentile ranges. An example of this would be put writing strategies where you only trade them if implied volatility is greater than the 75th percentile.

Once you’ve customized your backtest, simply click the "Submit: Backtest Portfolio" button to backtest your strategy.