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.
On Thu, Jun
I totally disagree.