Backtesting Equity Strategies Implemented with Options

Summary

The document asks whether software can backtest strategies that use options to implement signals on US equities. Its example is a moving-average crossover followed by buying call spreads, with performance evaluated across a group of stocks over a historical period. The central distinction is between testing the underlying equity signal and testing the actual option positions, whose payoffs, expirations, and trading prices determine portfolio returns.

The author points to limited coverage in open-source equity backtesting tools and notes that option data, especially meaningful bid and ask quotes, is a major obstacle. The discussion offers no product comparison, implementation, or performance evidence, so it is best read as a tooling and data question rather than a backtesting method. A credible test would need historical option quotes and realistic assumptions about spread execution; the document does not specify how to handle contract selection, liquidity, or transaction costs.

Key ideas

• Backtesting an equity signal does not by itself measure returns from option positions used to express it.
• A call spread can be used to implement a stock signal, but its historical payoff depends on option contracts and prices.
• Historical bid and ask data is identified as a major challenge for meaningful option backtests.
• The document asks about both open-source and commercial tools but does not evaluate any specific product.
• Contract selection, execution assumptions, and costs remain unresolved in the discussion.

Tags

# Backtesting with option


# Backtesting with option












More of a general question:

- is there anything there like a software to have any meaningful backtesting done on US equities with options in portfolios. Looking more of an off shelf product or open source something that can use for this purpose.

If you search online you get some products but nothing really to show some comprehensive data wise.

For example if you want to test just moving average crossover on stocks with you buying call spread etc and see what would be the returns on that strategy for past 5 years or so. Just an example here, most of the backtesting tools will let you see the returns on the stocks portion part instead of buying the stocks if you do call spread etc on say 100 of stocks etc, is there any tool out there.? I know the data can be problem since, to have meaningful bid/ask spread on option is huge but just say on top 50 names or indexes or something like that. Just thinking out load.

On opensource side, in R there is quantstrat and python zipline etc which deals with equity portion but I have not see anything even in commercial side which provide option with backtesting abilities.

Any pointers will be awesome.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.