That's pretty nifty. Thank you for sharing it.

Thank you! I didn't spend too much time on this (as I don't do much with options) and am currently working on other projects, but if people are interested I could touch this up a bit and turn it into a python library that is seamless and easy to use.

I've been interested in this for awhile. Isn't the black-scholes equation for European options? Or is the difference small enough to be negligible if the option is exercised near expiry?

i like your concept of a work around. but there is a major flow with what you are doing. it lies in the actual Implied Volatility input. when you use the BS model you are making the assumption that there is no skew (that all strikes have the same vol) and also making the assumption that volatility and the skew is constant. so unless you are getting very specific strike by strike vols you have a very large flaw in your testing.

I bring this up from experience in trying the same thing. testing results were in the "too good to be true" realm. good luck finding an "easy" solution.

Tim-you're right, this does not take into account volatility skew, don't think it is impossible to do so.

But I think you're missing the point of this tool; I am trying to create a close estimate of option prices so Quantopian users can start writing and testing their option-based algos so they can try to find something that works. Thus, users will be able to begin writing option algos before Quantopian adds option trading capabilities to their pipeline.

Volatility skew does not have a huge impact on the overall price of the options, especially if you are trading basket indices like the SPY (which I assume to be popular here). And, as Ranuka said,the black-scholes formula calculates the price of a European option. But most consider it a good estimate of an american option as there is often no reason to exercise it before expiration. Thus this work around will only provide close estimates of option prices. And close estimates should be enough for users to begin using options. When quantopian releases options these users will be able to quickly transfer and trade on their algos.

Another major flaw is bid-ask spread. In options per contract the bid-ask can be as wide as $1-$4/share or $100-$400 per contract. Any model will need a huge slippage model otherwise it will be easy to trade fair options all the time.

If we talk about the SPY mentioned above, usual bid-ask spread is 1 cent, which corresponds to $1 in 1 contract

Yeah I thought of the bid ask spread and almost included a formula that estimated spreads based on volume, but didn't think it was necessary for this. Remember tool is just an estimation so we can start thinking of option algos now and not have to wait for Qunatopian to release this capability. And if just test the black-scholes and pricing part of the above algorithm, I think you'll see the resulting prices are really good estimations in most cases. As Louri said spreads on SPY options are negligible.

I don't think missed the point. I applaud the effort. It's a good idea. Something I hacked quickly together using Bloomberg before I got something together with actual historical prices. And even that is a clunky hack.

"Scott Merrill said

skew does not have a huge impact on the overall price of the options, especially if you are trading basket indices like the SPY "

I disagree. It may not be huge but For sure it can take a nice strategy with a hypothetical 1.5-2.0 Sharpe to nearly zero.

You idea is doable and on track. But my point is that there are very nuanced pitfalls to that approach. Any code needs to specifically reference a strike, grab the implied vol for that exact strike on trade date, (again assuming you are getting accurate vols prints). And if it's a stock with all the dividend and + or - interest rate a stock has at the time (which is usually only available from a clearing firm and may or may not be historically tracked) and then grab implied vol for that same strike on exit.

There is a significant difference in actual p/l vs hypothetical p/l if you are off even by a couple strikes. I've got plenty of strategies from my initial tests that are great when just using raw ATM vols that were mediocre at best when actual vols were used.

Another thing to consider is you have to be using the exact same version of the BS model as where you are grabbing your vols. Just do a quick double check that you are generating option prices with your test that actually correspond to values that traded (or were quoted) in the market on a specific day.

I was going to bring up Bid/ask spread. But since there isn't one anymore (relative to 2000-2010 pre penny Increments) on the tier 1 liquid names I figured I'd let it go. But you would be surprised out much even a .05 per contract spread can eat at anything you create that has scale.

Good luck.

On Thu, Jun

I totally disagree.

anyone knows when will the option released ?

not sure if it's even something they are considering, but I'm curious as well...

Hi Viridian,

Adding support for options is not currently a priority for us in the near term. Currently, our focus is adding global equity markets to the platform.

Thanks
Josh

Not to be captain buzzkill but you have to be really cautious using this model. As mentioned above, option liquidity tends to be a problem and spreads (even on highly popular stocks can be quite high, and the depth can be thin). Amazon itself has around 3000 option contracts on a particular day, so that really thins the herd. Same goes for SPY. Though I guess it depends on your strategy, but OTM puts and calls become a game of crossing the spread and order sizing.

Also, IV is a tricky one. Obviously there is skew and smile effects to worry about, but also the fact that historical volatility does not have the same properties has implied, forwarding looking volatility. HV generally clusters and is practically always lower than IV, given the risk charge required by the seller.Also, it doesn't look like the stdev is annualized?