This package is a lightweight library written entirely in Python, designed to provide quick evaluation of option strategies.
The code produces various outputs, including the profit/loss profile of the strategy on a user-defined target date, the range of stock prices for which the strategy is profitable (i.e., generating a return greater than $0.01), the Greeks associated with each leg of the strategy, the resulting debit or credit on the trading account, the maximum and minimum returns within a specified lower and higher price range of the underlying asset, and an estimate of the strategy's probability of profit.
The probability of profit (PoP) for the strategy is calculated based on the distribution of estimated prices of the underlying asset on the user-defined target date. Specifically, for the price range in the payoff where the strategy generates profit, the PoP represents the probability that the stock price will fall within that range. This distribution of underlying asset prices on the target date can be lognormal, log-Laplace, or derived from the Black-Scholes model. Additionally, the distribution can be obtained through simulations (e.g., Monte Carlo) or machine learning models.
Despite the code having been developed with option strategies in mind, it can also be used for strategies that combine options with stocks and/or take into account the profits or losses of closed trades.
If you have any questions, corrections, comments or suggestions, just drop a message. You can also reach me on Linkedin.
The easiest way to install OptionLab is using pip:
pip install optionlab
Usage examples for several strategies can be found in the examples directory.
To evaluate an option strategy, you need to import the Strategy class from the strategy module and instantiate it:
from optionsmonkey.strategy import StrategyEngine
st = StrategyEngine()Next, you need to pass the input data to the getdata() method of the newly created Strategy object.
This method accepts the following parameters:
-
stockprice : float
Spot price of the underlying.
-
volatility : float
Annualized volatility.
-
interestrate : float
Annualized risk-free interest rate.
-
minstock : float
Minimum value of the stock in the stock price domain.
-
maxstock : float
Maximum value of the stock in the stock price domain.
-
strategy : list
A Python list containing the strategy legs as Python dictionaries (see below).
-
dividendyield : float, optional
Annualized dividend yield. Default is 0.0.
-
profittarg : float, optional
Target profit level. Default is None, which means it is not calculated.
-
losslimit : float, optional
Limit loss level. Default is None, which means it is not calculated.
-
optcommission : float
Broker commission for options transactions. Default is 0.0.
-
stockcommission : float
Broker commission for stocks transactions. Default is 0.0.
-
compute_the_greeks : logical, optional
Whether or not Black-Scholes formulas should be used to compute the Greeks. Default is False.
-
compute_expectation : logical, optional
Whether or not the strategy's average profit and loss must be computed from a numpy array of random terminal prices generated from the chosen distribution. Default is False.
-
use_dates : logical, optional
Whether the target and maturity dates are provided or not. If False, the number of days remaining to the target date and maturity are provided. Default is True.
-
discard_nonbusinessdays : logical, optional
Whether to discard Saturdays and Sundays (and maybe holidays) when counting the number of days between two dates. Default is True.
-
country : string, optional
Country for which the holidays will be considered if discard_nonbusinessdyas is True. Default is "US".
-
startdate : string, optional
Start date in the calculations, in "YYYY-MM-DD" format. Default is "". Mandatory if use_dates is True.
-
targetdate : string, optional
Target date in the calculations, in "YYYY-MM-DD" format. Default is "". Mandatory if use_dates is True.
-
days2targetdate : integer, optional
Number of days remaining until the target date. Not considered if use_dates is True. Default is 30 days.
-
distribution : string, optional
Statistical distribution used to compute probabilities. It can be "black-scholes", "normal", "laplace" or "array". Default is "black-scholes".
-
nmcprices : integer, optional
Number of random terminal prices to be generated when calculationg the average profit and loss of a strategy. Default is 100,000.
As said above, the strategy itself must be passed as a list of Python dictionaries, each dictionary representing a strategy leg. The keys in this dictionary depend on the type of the leg.
For options, the dictionary should contain up to 7 keys:
-
"type" : string
Either "call" or "put". It is mandatory.
-
"strike" : float
Option strike price. It is mandatory.
-
"premium" : float
Option premium. It is mandatory.
-
"n" : integer
Number of options. It is mandatory.
-
"action" : string
Either "buy" or "sell". It is mandatory.
-
"prev_pos" : float
Premium effectively paid or received in a previously opened position. If positive, it means that the position remains open and the payoff calculation takes this price into account, not the current price of the option. If negative, it means that the position is closed and the difference between this price and the current price is considered in the payoff calculation.
-
"expiration" : string | integer
Expiration date in "YYYY-MM-DD" format or number of days left before maturity, depending on the value in use_dates (see below).
For stocks, the dictionary should contain up to 4 keys:
-
"type" : string
It must be "stock". It is mandatory.
-
"n" : integer
Number of shares. It is mandatory.
-
"action" : string
Either "buy" or "sell". It is mandatory.
-
"prev_pos" : float
Stock price effectively paid or received in a previously opened position. If positive, it means that the position remains open and the payoff calculation takes this price into account, not thecurrent price of the stock. If negative, it means that the position is closed and the difference between this price and the current price is considered in the payoff calculation.
For a non-determined previously opened position to be closed, which might consist of any combination of calls, puts and stocks, the dictionary must contain two keys:
-
"type" : string
It must be "closed". It is mandatory.
-
"prev_pos" : float
The total value of the position to be closed, which can be positive if it made a profit or negative if it is a loss. It is mandatory.
For example, let's say we wanted to calculate the probability of profit for naked calls on Apple stocks with maturity on December 17, 2021. The strategy setup consisted of selling 100 175.00 strike calls for 1.15 each on November 22, 2021.
The strategy and additonal input data must be passed to the getdata() method of the Strategy object as follows:
strategy=[{"type":"call","strike":175.00,"premium":1.15,"n":100,"action":"sell"}]
st.getdata(stockprice=164.04,startdate="2021-11-22",targetdate="2021-12-17",volatility=0.272,
interestrate=0.0002,minstock=120,maxstock=200,strategy=strategy)The calculations are performed by calling the run() method of the Strategy object:
out=st.run()This method returns a Python dictionary with the calculation results stored under the following keys:
-
"ProbabilityOfProfit" : float
Probability of the strategy yielding at least $0.01.
-
"ProfitRanges" : list
A Python list of minimum and maximum stock prices defining ranges in which the strategy makes at least $0.01.
-
"StrategyCost" : float
Total strategy cost.
-
"PerLegCost" : list
A Python list of costs, one per strategy leg.
-
"ImpliedVolatility" : list
A Python list of implied volatilities, one per strategy leg.
-
"InTheMoneyProbability" : list
A Python list of ITM probabilities, one per strategy leg.
-
"Delta" : list
A Python list of Delta values, one per strategy leg.
-
"Gamma" : list
A Python list of Gamma values, one per strategy leg.
-
"Theta" : list
A Python list of Theta values, one per strategy leg.
-
"Vega" : list
A Python list of Vega values, one per strategy leg.
-
"MinimumReturnInTheDomain" : float
Minimum return of the strategy within the stock price domain.
-
"MaximumReturnInTheDomain" : float
Maximum return of the strategy within the stock price domain.
-
"ProbabilityOfProfitTarget" : float
Probability of the strategy yielding at least the profit target.
-
"ProfitTargetRanges" : list
A Python list of minimum and maximum stock prices defining ranges in which the strategy makes at least the profit target.
-
"ProbabilityOfLossLimit" : float
Probability of the strategy losing at least the loss limit.
-
"AverageProfitFromMC" : float
Average profit as calculated from Monte Carlo-created terminal stock prices for which the strategy is profitable.
-
"AverageLossFromMC" : float
Average loss as calculated from Monte Carlo-created terminal stock prices for which the strategy ends in loss.
-
"ProbabilityOfProfitFromMC" : float
Probability of the strategy yielding at least $0.01 as calculated from Monte Carlo-created terminal stock prices.
To obtain the probability of profit of the naked call example above:
print("Probability of Profit (PoP): %.1f%%" % (out["ProbabilityOfProfit"]*100.0)) # 84.5%, according to the calculationsAlthough functional, OptionLab is still in its early stages of development. The author has limited time available to work on this library, which is why contributions from individuals with expertise in options and Python programming are greatly appreciated.
This is free software and is provided as is. The author makes no guarantee that its results are accurate and is not responsible for any losses caused by the use of the code. Bugs can be reported as issues.