We have previously covered David Sun’s (@thetradebusters) Theta Engine in one of our blog posts. The power of Theta Engine comes from David’s unique method for determining the size of short put positions. For more details on his approach, please refer to our blog post and his website.

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About the variant​

Claudio Valerio, a valued member of our community has created and shared a variant of the Theta Engine strategy. His modification includes a dynamically added long put hedge during periods of elevated Implied Volatility (IVRank > 50). He selects the contract closest to Delta=4 with the same expiration as the short put. The number of purchased contracts is three times the number of shorts sold. Additionally, Claudio has adjusted how the parallel positions are spread out and increased the planned capital of the trade.

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Volatility based Hedging​

IV Rank is used to define two regimes for the market.

Low volatility regime​

When the ATM Implied Volatility for SPX Options is below the mid point of its 52 week high-low range (IVRank < 50), we go with naked shorts as the original trade did.

Elevated volatility regime​

When IVRank reaches (or goes beyond) 50, then 3x as many longs are added as shorts, creating a 3:1 Put Ratio Backspread. With the added hedge he is substantially reducing the downside risk and capping the upside profit potential.

Note on hedging​

While ThetaEngine originally does not contain a hedging component, David has shared his hedging strategies (Vibranium Shield and Bomb Shelter) in great detail. Hedging is a must when it comes to selling options, therefore we suggest that you study David’s original hedges or Claudio’s variant with the built-in hedge. It shall be noted that while reactive hedging (as presented here) is a cost-efficient way, it will likely not provide good coverage for scenarios where the market is closed and crashing, such as during the 9/11 events.

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Differences​

The following section shows the two trades side-by-side.

Job Definition​

Risk Graph​

To study the characteristics of the trade we'll be using OptionNet Explorer. The following two screenshots are showing the Risk Graph when the position is naked short and when the hedge is added.

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Thanks​

We would like to thank Claudio for sharing the Volatility Hedged Theta Engine and David for creating the original trade plan!

We are pleased to announce that MesoSim-2.8 has been released on May 27, 2023, effectively expanding our offerings to include new Market Data and Reg-T Margin Calculation capabilities.

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List of improvements​

VIX Options​

In response to your feedback received through the Data Survey, we are expanding our offering to include VIX Options. This new data set allows us to cover better the broad-based indices utilized by both retail and institutional traders.

Please note that VIX is currently in the beta phase, as certain tasks such as Settlement to VIX Futures and IV calculation are yet to be finalized. For the latest information, please visit our Service Status page.

If you are interested in VIX trading strategies, we recommend exploring Russell Rhoads' presentations and books as valuable resources.

Reg-T Margin Calculation​

In response to a common user request, we have incorporated Reg-T Margin calculation into the simulator, based on the CBOE's Margin Manual. 

Calculating Reg-T margin is a complex task that requires the system to effectively analyze and deconstruct a set of contracts into known structures to accurately determine the associated margin. Although the calculation rules are clearly defined, the combinations of structures can vary significantly. Furthermore, brokers have the discretion to include additional margin requirements based on their own house margin rules, which are frequently implemented.

While Options Backtesting Software, such as OptionNet Explorer, perform its own Reg-T Margin calculations, we have observed occasional deviations from the standard. In order to ensure accuracy, we have validated our implementation with all the tests described in the margin manual. Moreover, validations were also conducted with real brokerages, such as TD Ameritrade and TastyTrade.

Overall, we have added over 3500 lines of new code to our code base, making it the most extensive change implemented for the service thus far.

You can find a Margin Enabled run in this link.

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MesoSim meets Academia​

In order to support Options Education, we are initiating a program that offers complimentary access to MesoSim for classes focusing on Derivatives and Options at Universities.

If you are a lecturer interested in incorporating our service into your curriculum, please contact us at [email protected]

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Roadmap​

Once we address the remaining tasks related to VIX and Reg-T, we will proceed with implementing measures to support Forward Testing. Certain features, such as enhanced visualization, will first be provided via the backtesting offering.

The complete list of work items is collected here.

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Upcoming Pro plan​

As previously indicated, we are planning to introduce a Pro plan for MesoSim. The Basic Plan will allow users to backtest SPX and Crypto Options, while the Pro Plan will include additional features such as RUT & VIX Data Sets and Reg-T Margin Calculation. The Pro Plan will be available as soon as we transition VIX and Reg-T from beta to stable (sometime in the summer of 2023).

Customers with an ongoing subscription will enjoy all the benefits offered by the Pro plan at their original subscription price.

We are pleased to announce the release of MesoSim version 2.7, which comes with exciting new features that enhance the options backtesting capabilities for our users.

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List of improvements​

Russell-2000 Index​

One of the key features of this release is the addition of the Russell 2000 index (RUT), which enables users to validate their strategies on RUT with a single line of change. This allows for a better assessment of robustness by having a correlated instrument to run fully out-of-sample tests.

Litmus test for Boxcar-NG and NetZero​

We were excited to run both Boxcar-NG and NetZero on Russell, expecting a slight performance degradation (as the backtests are slightly optimistic by nature) compared to SPX.

The results speak for themselves:

• NetZero-SPX-2021 vs NetZero-RUT-2021
• NetZero-SPX-2022 vs NetZero-RUT-2022
• Boxcar-NG-SPX-2021 vs Boxcar-NG-RUT-2021
• Boxcar-NG-SPX-2022 vs Boxcar-NG-RUT-2022

AddLegsAdjustment: Road to Black Swan Hedge and A14 Strategies​

The new version also introduces the Add Legs Adjustment feature, which allows users to add single or multiple legs as adjustments to their strategies. This capability is required to simulate more dynamic strategies such as Ron Bertino’s Black Swan Hedge or Amy Meissner’s A14 Strategy. 

The Add Legs Adjustment feature's usage is demonstrated via two built-in templates:

• SPX-AddLegAdjustment
• SPX-AddPDSAdjustment

Rolling legs horizontally: Requirement for the Anchor Trade​

MoveLegAdjustment now supports moving the leg to new expiration, which is required for backtesting Steady Options' Anchor Trade.

Stepping on Strikes​

With Version-2.6, we allowed backtests to re-use legs across positions. To further enhance the flexibility of the platform, we have introduced a non-constrained leg selection ("LegSelectionConstraint": "None"), which allows strikes to be re-used for legs even within positions.

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Convenience features and fixes​

We have also addressed the annoyance of missing fields appearing as warnings (in yellow) by automatically upgrading jobs during Cloning and providing users the possibility to upgrade templates with a click of a button.

The new version also comes with minor fixes for OptionNet Explorer compatibility, UI, and missing data handling categories.

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Roadmap​

Looking ahead, we remain committed to improving MesoSim’s capabilities by adding new features and additional data to push the boundaries of Options Backtesting Software.

We plan to add VIX, more scripting capabilities, and calculating Reg-T margin before tackling Forward Testing. The current roadmap is available here.

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Upcoming Pro plan​

Some of the new features and datasets will go into the Pro plan of the options backtesting offering in the future, and customers with ongoing subscriptions will enjoy grandfathered pricing for the (yet to be announced) new Pro plan.Overall, MesoSim version 2.7 is a significant step forward in our mission to provide our users with the best possible options backtesting experience.

We look forward to hearing your feedback on these new features.

We are happy to share that two of our most requested features were added to MesoSim:

External Data from CSV:

Users can now bring their own indicators / signals / pricing data via the External Data interface. Just upload the data to Github Gist or Google Sheets and specify the URL in your backtest run. From that point, all your variables can be used in all Lua Statements as variables. 

Stepping on booked Strikes:

Prior to MesoSim 2.6, the options contracts usable for new entries and adjustments were excluding contracts that were taken by any leg in any position. This behaviour was a useful simplification in our SimBroker and also represented how we personally trade options strategies. Some of our users, however, don't mind re-using options contracts. To support their use-case we implemented a mode of operation which enables sharing contracts across positions. 

Please head to our official documentation to read more about the mechanics of this two new features.

Upcoming features:

• We are actively working on adding Russell-2000 (RUT) and VIX data
• Add Leg Adjustments are the next key feature we are delivering soon

We are pleased to announce version 2.5 of MesoSim which includes the following improvements:

• Crypto graduates to Stable:
  Simulation of Crypto Options (BTCUSD and ETHUSD) traded in Deribit is now fully supported. The documentation has full coverage of Crypto extensions.
  See the BTCUSD-Straddle-2022 featured run to get started, or browse our strategy library for other ideas.

• Remove Leg Adjustment:
  It is now possible to conditionally remove a leg and adjust the structure afterward. Please check out the docs and the built-in template [SPX-RemoveLegAdjustment] for reference.

• Multiple Adjustments:
  You can do multiple adjustments in one simulation cycle, allowing moving complete structures leg-by-leg. For reference, see the [SPX-MultiLegAdjustment] template.

• Historical volatility for the underlying:
  underlying_hv variable is now available, representing the 30-day historical (or realized) volatility.

• Education material:
  We also started to put together training material to get you started easier.
  You can find the Work in Progress version of the presentation here.

Data Survey result

Thanks to everyone filling out our Data Survey.Based on your responses, we will add Russel-2000 (RUT) Index Options shortly, and later in the year, we'll add VIX as well.

Next work items

In the next cycle, we'll further improve our flexibility related to Adjustments, External Data (CSV) and will keep addressing the rough edges reported by our users.