Backtesting
Monday, November 18th 2019
VIX Delta Neutral Backtest Using Futures
Index options can be backtested with delta neutral hedging using the implied futures price for the appropriate expiration in the ORATS system.
Summary
ORATS offers delta neutral hedging for indexes using the implied futures price, which is determined using put call parity. This allows for backtesting of VIX call options using the implied futures price for the appropriate expiration, as shown in a specific example where a delta neutral hedged position was exited for a profit of $31.63.
We received a question from a backtester client:
Correct, the cash does not trade and options are priced off the future, however, ORATS does offer delta neutral hedging for indexes using the implied futures price. The implied futures price is determined using put call parity.
For example, from our trades section of the backtest, a VIX call option with an 11/27/19 expiration was opened on 10/30/2019 and hedged delta neutral at the price $15.43. Subsequently, every day the position was hedged back to delta neutral and exited on 11/13/19 at $14.28 for a profit of $31.63.
On 10/30/19 the implied VIX futures price was $15.43 for the 11/27/19 expiry as shown here on the ORATS data API reading for VIX expirations:
On 11/13/19 the implied VIX price was $14.28 for the 11/27/19 expiry showing that the backtest does indeed use the implied futures prices to hedge:
It is important to hedge indexes with futures especially the VIX where there is usually contango, short term futures trading at lower prices than long term.
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