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Equity and Index Options Simulation

MesoSim simulates both equity and index options with high fidelity, while making certain practical simplifications to ensure efficient backtesting. Understanding the distinctions and commonalities between these option types helps you design more accurate trading strategies.

Supported Instruments​

MesoSim supports options across two main categories of TradFi instruments:

Index Options​

  • SPX (S&P 500 Index): European-style, cash-settled (data from 2010)
  • RUT (Russell 2000 Index): European-style, cash-settled (data from 2012)
  • VIX (Volatility Index): European-style, cash-settled (data from 2012)

Equity Options​

  • GLD (SPDR Gold Trust): American-style, traditionally physically-settled (data from 2012)

Differences Between Index and Equity Options​

Exercise & Settlement​

Index Options (SPX, RUT, VIX) - European Style

  • Can only be exercised at expiration, no early exercise risk
  • Settle to cash value at expiration, no physical delivery possible (indices cannot be traded)
  • Standard settlement calculation based on next day opening prices (AM settlement) or closing prices (PM settlement)
  • Priced using the Black-Scholes-Merton model

Equity Options (GLD) - American Style

  • Can be exercised at any time before expiration, early exercise considerations apply
  • Real-world GLD options require delivery of GLD ETF shares
  • However, in MesoSim, GLD is treated as cash-settled for simplification
  • Priced using the Cox-Ross-Rubinstein Binomial Option Pricing model
Why Cash-Settle GLD in MesoSim?

This design choice to treat GLD as cash-settled:

  • Maintains consistency across all instruments
  • Avoids the complexity of simulating equity positions and corporate actions
  • Has minimal impact on options-focused strategies
  • Simplifies backtesting without sacrificing accuracy for most use cases

Contract Specifications​

Index Options

  • Often have multiple root symbols (e.g., SPX/SPXW, RUT/RUTW)
  • Different roots may have different expiration schedules
  • Standard contract represents 100 units of the index value

Equity Options

  • Usually single root symbol (e.g., GLD)
  • Standard contract represents 100 shares

Early Exercise Considerations​

Early exercise of American options typically occurs when:

  1. Dividend capture: Exercising calls before ex-dividend dates
  2. Deep in-the-money options: When intrinsic value exceeds time value significantly

GLD Early Exercise Risk​

Since GLD does not pay dividends, early exercise risk is minimal.

However, if you need to simulate probabilistic early assignment, you can use the Exit.Conditions feature:

"Exit": {
  "Conditions": [
    "leg_long_call_dte < 5 and underlying_price > leg_short_call_strike * 1.02 and random(0, 1) > 0.95 -- exit with 5% probability when option becomes ITM"
  ]
}

The above statement exits the full position with 5% probability when Days Till Expiry is below 5 widh 5% probability, sampled with Exit.Schedule. A similar approach can be used using Conditional Adjustments' RemoveLegAdjustment to remove a single from a complex position.

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