Crypto Options Strategies Backtesting
Evaluating and optimizing options strategies for a crypto hedge fund trading on Derebit
Problem Statement
A crypto hedge fund trading on Derebit wanted to devise BTC options trading strategies and understand market dynamics better. Multiple strategies were being developed and deployed and it was necessary to backtest and optimize these strategies for different market conditions.
Challenges
- Newly launched options markets with inefficiencies and deviations from theoretical behavior
- Inherent complexity in options data and multi-leg options strategies with continuous position optimization
- Avoiding overfitting to historical performance
Solution
Summary
I developed a backtesting framework that simplified codification of strategy, evaluation of performance metrics and strategy optimization. I modelled options premiums and probability of profit for options with different characteristics.
Approach
- Analysis of options cost including studying historical distributions, modeling of premiums for different strikes and expiries in different market conditions and combinations of greeks, and identification of statistical arbitrage opportunities based on theoretical Black-Scholes pricing
- Development of strategy optimization framework to generate backtesting results and identify best strategy parameters
- Using understanding of relationship between greeks and option price movement to develop position management strategies
- Forward testing strategies to evaluate the impact of slippage and strategy deployment date on performance
Impact
- Traders routinely used options pricing guidelines to ensure that they are not overpaying for trades
- Backtesting results informed strategy fine tuning decisions and in some cases strategy overhauls
Empirical Modelling of Options Premiums
Example Options Strategy
Strategy Evaluation Results and Optimization
Results & Impact
Optimized Strategy Outperformance vs BTC underlying
Reduction in drawdowns through strategy optimization
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