Hi,
I trade predominantly short call/put options in u.s market around the 1.2-1.3 S.D OTM points and 55-45 DTE. I place greater emphasis on probability of ITM/OTM and volatility than I do with other greeks. I keep a mental note of deltas (negative at the moment, not trying to stay neutral). By default, I'd have a low gamma risk because of my entry & exit points (out of trades usually >15 DTE), but don't use it as a measure/filter. Volatility skew does not concern me either, I'd still sell the other side as it does not require additional margin and P&L appears to be positive despite POP decreasing.
I rely on third party sites for information as I don't have access to options data to back-test and don't know what programs to use.
Thanks. To repeat my understanding:
So you are neg gamma if not intensively so. Write options with presumably variable ratios on call and put wings OTM at inception and roll forward via calendars to maintain approximate maturity. Target deltas at inception (ie look at ITM/OTM) but are not tightly managing these as a book subsequently. Happy to sell into skew....noting that this is profitable (this is where we are highly aligned, if the actual implementation is not identical).
Bottom line appears you are seeking to profit from theta decay and opening positions based on a set of rules related to initiation delta. Although you keep an eye on vol, I am not sure what you are doing with this information. I do not know how you find mis-valuation as opposed to using the above to shape the payoff.
If this is correct, a key difference between what I am seeking to do and what you are doing is tightness of delta hedging. For discussion purposes right now, the actual positions mean less to me than the greek outcomes which are broadly similar apart from the fact that you are happy to let delta roam. If gamma got too large and pin risk became an issue, I would roll. In reality, I look for discontinuities in the vol surface that were not well explained for position initiations and try to get a desired strategy shape across a range of metrics.
I built my own backtest engine back in the day. MatLab infrastructure. I presently have a blank sheet of code space waiting to be filled again if I go ahead with this. The underlying method for this purpose will be Black's approximation for the most part, but I will also build in a binomial lattice in case I need more flexibility for GARCH effects or events.
For my purposes, if IV exceeded realised vol, a profit was made as everything would be hedged continuously etc. Obviously this is an approximation, but one which is adequate for my purposes. The differences between the approximation and reality are what creates the edge. There is almost always be a bias in IV and skew due to risk management concerns and frictions. I am seeking to arb that because I do not face specific elements of those concerns in the same way and am more prepared to accept basis given smaller relative position sizes, available cross-sectional diversity and propensity to accept time diversification. The underlying argument is hardly rocket science and is simply one relating to the price for risk bearing.
I have history and live data on active series. I do not have it for historical, inactive, series. Backtests would need to be of the type that uses current options pricing and historical market developments. Kind of like shock tests based on historical data. It would also give an idea of the distribution of return outcomes for a given strategy, even if the mean is off. Backtests for options are quite different in purpose than for other types of equity strategies for this strategy type so full history is not actually needed by me if I have VIX vs realised. The rest is risk management.
If you wish to collaborate at some level, the key areas of overlap in terms of objectives seems to relate to viewpoints on what represents value in the outer wings to neg gamma traders. Position sizes may also vary depending on views on what value is inherent in the current level of IV, skew and calendar effects. Possibly, you may have a wish to share/exchange views on re-hedging delta. I will do this via algo, but there will be acceptable basis risk which can be tightened with discretion. S&P 500 would be a good enough place to start as any.
It would be great to get an active forum of less directionally oriented option traders going here. Please let me know if some form of collaboration might be useful to you (and others...)