We calculate
based on the underlying returns probability distribution
...and find

This is not a "yet-another-backtesting" software!

It is much better and here is why:

  • Options Fair Value is independent from the options market. The Volatility Surface from the past may not be relevant today. More...
  • More historical data points to consider. Fair Value is available for any past period even without a liquid options market. More...
  • Fair Value avoids the "sequentiality" of a conventional backtest and captures the probabilities distribution instead of an occasional price path. More...
Backtesting the Backtest: Fair Value Validity Check

Can past data be a reliable source for the future? Out-of-sample test for Fair Values validity.

Efficiency of Put Options as a Hedge

Puts are systematically overpriced but provide a cushion against volatility. Can they improve the total compounded return?

Bitcoin Options Fair Values

How would the Fair Values and “volatility smile” of hypothetical Bitcoin options look like?

Covered Calls in Bull Market

Calls selling in Bull Markets has negative expected profit. Is there a way to make Covered Calls efficient?

Are puts really overpriced?

Selling puts on equity indices are very profitable on average. But high volatility with huge negative “fat tails” makes it not so attractive

Puts on VXX: good for buying?

VXX is an ETP designed for VIX exposure. But due to contango in VIX futures, its value is constantly diminishing. Does that make puts attractive?

Covered calls: less profit with less risk

Calls on equity indices are fairly priced on average. Selling them adds nothing to the portfolio expected profit but decreases its volatility.

Our approach
Calculate Options Fair Value

OptionSmile is an online software platform that utilizes the historical distribution of underlying security returns to find an option Fair Value - a price at which both buyer and seller have zero expected profit, net of transaction costs.

It equals to the probability of expiration “in-the-money” (Pitm) multiplied by the expected value of the contract in case of such expiration (EVitm) and discounted to get a present value (e-rt).

It is a model-free (non-parametric) approach.


Find Market Mispricing

Fair Values are based on the underlying security distribution and do nothing with the option traders views on volatility and probabilities. This is an objective historical “reality”.

By comparing the Fair Value and the Market Price, we find out if an option contract is overestimated or underestimated by the market.

Market prices can be taken from the current moment to calculate a real-time mispricing or from the historical option quotes to discover the regimes with systematic mispricing in the past.


Build Confidence Intervals for Fair Value

Fair Value is essentially the mathematically expected payoff at expiration: all possible outcomes weighted by their probabilities.

Since it is a probabilistic estimation, we have not just one Fair Value number but its whole distribution. With different quantiles - 1%, 5%, 25%, 50%, 75%, 95%, and 99% - we build the confidence intervals for the Fair Value, in which it gets with certain probability: 98%, 90%, and 50%.

With the representation of “box-plots”, they provide an estimation of the statistical significance of market mispricing.


Filter Historical Data to Identify Market Regimes

The market lives in regimes when it behaves differently and demonstrates specific character. In each of these regimes, options Fair Values vary substantially.

We apply different indices and indicators to easily spot the distinct regimes with specific patterns and calculate Fair Values and mispricing for the selected regime or time period.

Filtering indicators can be various: macroeconomic, volatility, technical, etc. We automatically calculate their real-time values and selects from the past only those dates that resemble the current market condition - for the Fair Values calculation.


Get Comprehensive Performance Metrics for Options Strategies

The OptionSmile platform can calculate Fair Values of multileg option strategies and, by comparing them with the market prices, find a mispricing.

Strategy metrics are not limited to the expected profit/loss and represent a full dashboard of performance indicators such as distribution histogram, margins, standard deviation, Sharpe/Sortino ratios, tail risk, optimal position sizing, equity lines and more.

As with a single contract, the strategy efficiency can be measured against either real-time or historical market prices.


Explore Statistics of Underlying Returns Distribution

The market regimes filtering can be applied not just for trading options but for the linear assets as well. OptionSmile platform produces various statistics of the underlying security returns.

Mean return, standard deviation, Sharpe ratio, Implied-to-Realized volatility, statistical significance tests, probability density, and cumulative distribution charts of underlying returns. All that is a valuable by-product of the options Fair Value calculation.


The information provided on this Website is for informational purposes only and should not be considered as an investment advice. It is not intended to replace consultation with a qualified financial professional. Investing in options involves risk of potential loss exceeding the whole amount of money invested. No one should make any investment decision without first consulting his or her own financial advisor and conducting his or her own research and due diligence.