Backtesting Options Strategies

Backtesting options is fundamentally different from stocks because options have multiple dimensions: price, time decay, volatility, and Greeks. A backtest that ignores these will give misleading results.

Implied volatility (IV) is critical. Selling options in high IV environments vs low IV environments produces dramatically different results. Your backtest should account for the IV environment at entry.

Bid-ask spreads on options can be significant, especially on less liquid underlyings. Always include realistic fill assumptions in your backtest — mid-price fills are optimistic.

Time decay (theta) is your friend when selling options and your enemy when buying. A proper backtest should model daily theta decay, not just entry and exit prices.

Popular strategies to backtest include selling puts (wheel strategy), iron condors, credit spreads, and covered calls. Each has unique risk profiles that only show up with proper backtesting.