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

	leg_1							leg_2							totals
	contract	underlying	expiration	type	strike	cost	order	contract	underlying	expiration	type	strike	cost	order	cost	qty	date
0	SPX170317C00300000	SPX	2017-03-17	call	300	195010.0	Order.BTO	SPX170317P00300000	SPX	2017-03-17	put	300	5.0	Order.BTO	195015.0	2.0	2017-01-03
1	SPX170317C00300000	SPX	2017-03-17	call	300	-197060.0	Order.STC	SPX170317P00300000	SPX	2017-03-17	put	300	-0.0	Order.STC	-197060.0	2.0	2017-02-01
2	SPX170421C00500000	SPX	2017-04-21	call	500	177260.0	Order.BTO	SPX170421P01375000	SPX	2017-04-21	put	1375	60.0	Order.BTO	177320.0	2.0	2017-02-01
3	SPX170421C00500000	SPX	2017-04-21	call	500	-188980.0	Order.STC	SPX170421P01375000	SPX	2017-04-21	put	1375	-5.0	Order.STC	-188985.0	2.0	2017-03-01
4	SPX170519C01000000	SPX	2017-05-19	call	1000	138940.0	Order.BTO	SPX170519P01650000	SPX	2017-05-19	put	1650	100.0	Order.BTO	139040.0	3.0	2017-03-01
5	SPX170519C01000000	SPX	2017-05-19	call	1000	-135290.0	Order.STC	SPX170519P01650000	SPX	2017-05-19	put	1650	-20.0	Order.STC	-135310.0	3.0	2017-04-03

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()

	total capital	cash	VOO	TUR	RSX	options qty	calls capital	puts capital	stocks qty	VOO qty	TUR qty	RSX qty	options capital	stocks capital	% change	accumulated return
2017-01-02	1.000000e+06	1000000.00000	NaN	NaN	NaN	NaN	NaN	NaN	NaN	NaN	NaN	NaN	0.0	0.000000	NaN	NaN
2017-01-03	9.990300e+05	110117.40592	199872.763320	49993.281167	249986.549593	2.0	389060.0	0.0	16186.0	1025.0	1758.0	13403.0	389060.0	499852.594080	-0.000970	0.999030
2017-01-04	1.004228e+06	110117.40592	201052.238851	50072.862958	251605.333911	2.0	391380.0	0.0	16186.0	1025.0	1758.0	13403.0	391380.0	502730.435720	0.005203	1.004228
2017-01-05	1.002706e+06	110117.40592	200897.553535	49865.950301	250564.686850	2.0	391260.0	0.0	16186.0	1025.0	1758.0	13403.0	391260.0	501328.190686	-0.001516	1.002706
2017-01-06	1.003201e+06	110117.40592	201680.647945	49372.543196	248830.275081	2.0	393200.0	0.0	16186.0	1025.0	1758.0	13403.0	393200.0	499883.466222	0.000494	1.003201

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