fix(options): fix time spread and flaky strategies

README.md

@@ -129,7 +129,7 @@ Greeks { delta: 0.013645840354947947, gamma: -0.0008813766475726433, theta: 0.17
 
 Quantrs also supports plotting option prices and strategies using the `plotters` backend.
 
-E.g., Plot the P/L of a slightly skewed Condor spread:
+E.g., Plot the P/L of a slightly skewed Condor spread using the Monte-Carlo model:
 
 <details>
 <summary><i>Click to see example code</i></summary>
@@ -148,24 +148,26 @@ let options = vec![
     EuropeanOption::new(instrument.clone(), 115.0, 1.0, Call),
 ];
 
-// Create a new Black-Scholes model with:
+// Create a new Monte-Carlo model with:
 // - Risk-free interest rate (r) = 5%
 // - Volatility (σ) = 20%
-let model = BlackScholesModel::new(0.05, 0.2);
+// - Number of simulations = 10,000
+// - Number of time steps = 365
+let model = MonteCarloModel::geometric(0.05, 0.2, 10_000, 365);
 
 // Plot a breakdown of the Condor spread with a spot price range of [80,120]
 model.plot_strategy_breakdown(
     "Condor Example",
     model.condor(&options[0], &options[1], &options[2], &options[3]),
     80.0..120.0,
-    "path/to/destination.png",
+    "examples/images/strategy.png",
     &options,
 );
 ```
 
 </details>
 
-![condor_strategy](./examples/images/condor.png)
+![condor_strategy](./examples/images/strategy.png)
 
 <!--<div align="center">
   <img src="https://github.com/user-attachments/assets/0298807f-43ed-4458-9c7d-43b0f70defea" alt="condor_strategy" width="600"/>
@@ -176,7 +178,7 @@ See the [documentation][docs-url] for more information and examples.
 ## Benchmarks
 
 Compared to other popular and well-maintained (i.e., actively developed, well-documented, and feature-rich) options pricing libraries, quantrs competes well in terms of performance:
-E.g., for building and pricing a European call with the Merton Black-Scholes model, quantrs is:
+E.g., for pricing a European call with the Merton Black-Scholes model, quantrs is:
 
 - **87x faster** than `py_vollib`
 - **29x faster** than `QuantLib` (python bindings)

examples/options_pricing.rs

@@ -249,7 +249,9 @@ fn example_rainbow() {
 }
 
 fn example_strategy() {
-    let model = BlackScholesModel::new(0.0025, 0.15);
+    // let model = BlackScholesModel::new(0.0025, 0.15);
+    // let model = MonteCarloModel::geometric(0.05, 0.2, 10_000, 365);
+    let model = BinomialTreeModel::new(0.05, 0.2, 100);
     let instrument = Instrument::new().with_spot(50.0);
 
     ////////////////////
@@ -587,32 +589,28 @@ fn example_strategy() {
     ); // => Calendar Spread: examples/images/calendar_spread_strategy.png
 
     let options = vec![
-        EuropeanOption::new(instrument.clone(), 60.0, 1.0 / 12.0, Call),
-        EuropeanOption::new(instrument.clone(), 75.0, 2.0 / 12.0, Call),
-        EuropeanOption::new(instrument.clone(), 60.0, 1.0 / 12.0, Call),
+        EuropeanOption::new(Instrument::new().with_spot(48.0), 49.0, 1.0 / 12.0, Call),
+        EuropeanOption::new(Instrument::new().with_spot(48.0), 49.0, 1.0 / 12.0, Call),
+        EuropeanOption::new(Instrument::new().with_spot(48.0), 50.0, 2.0 / 12.0, Call),
     ];
     let _ = model.plot_strategy_breakdown(
         "Diagonal Spread",
         model.diagonal_spread(&options[0], &options[1], &options[2]),
-        20.0..80.0,
+        40.0..60.0,
         "examples/images/diagonal_spread_strategy.png",
         &options,
-    ); // => Diagonal Spread: examples/images/diagonal_spread_strategy.png
+    ); //model.diagonal_spread(&options[0], &options[1], &options[2])(50.0);
 }
 
 fn example_plots() {
-    // Create a new plotter and plot the option prices
-    // let plotter = Plotter::new();
-    // let _ = plotter.plot_option_prices(
-    //     "Binary Call Option",
-    //     instrument,
-    //     80.0..120.0,
-    //     0.1..1.0,
-    //     0.1,
-    //     Call,
-    //     |k, t| BinaryOption::cash_or_nothing(instrument.clone(), k, t, Call),
-    //     "path/to/destination.png",
-    // );
+    // Create a new Monte-Carlo model with:
+    // - Risk-free interest rate (r) = 5%
+    // - Volatility (σ) = 20%
+    // - Number of simulations = 10,000
+    // - Number of time steps = 365
+    let model = MonteCarloModel::geometric(0.05, 0.2, 10_000, 365);
+
+    // Create a new instrument with a spot price of 100 and a dividend yield of 2%
     let instrument = Instrument::new().with_spot(100.0).with_cont_yield(0.02);
 
     // Create a vector of European call options with different strike prices
@@ -623,16 +621,12 @@ fn example_plots() {
         EuropeanOption::new(instrument.clone(), 115.0, 1.0, Call),
     ];
 
-    // Create a new Black-Scholes model with:
-    // - Risk-free interest rate (r) = 5%
-    // - Volatility (σ) = 20%
-    let model = BlackScholesModel::new(0.05, 0.2);
-
+    // Plot a breakdown of the Condor spread with a spot price range of [80,120]
     let _ = model.plot_strategy_breakdown(
         "Condor Example",
         model.condor(&options[0], &options[1], &options[2], &options[3]),
         80.0..120.0,
-        "examples/images/condor.png",
+        "examples/images/strategy.png",
         &options,
     );
 }

src/options/models/binomial_tree.rs

@@ -72,7 +72,7 @@
 //! println!("Option price: {}", price);
 //! ```
 
-use crate::options::{Option, OptionPricing, OptionStyle};
+use crate::options::{Option, OptionPricing, OptionStrategy, OptionStyle};
 
 /// Binomial tree option pricing model.
 #[derive(Debug, Default)]
@@ -150,3 +150,5 @@ impl OptionPricing for BinomialTreeModel {
         panic!("BinomialTreeModel does not support implied volatility calculation yet");
     }
 }
+
+impl OptionStrategy for BinomialTreeModel {}

src/options/models/black_76.rs

@@ -1,6 +1,6 @@
 //! Module for Black76 option pricing model.
 
-use crate::options::{Option, OptionPricing};
+use crate::options::{Option, OptionPricing, OptionStrategy};
 
 /// Black76 option pricing model.
 #[derive(Debug, Default)]
@@ -33,3 +33,5 @@ impl OptionPricing for Black76Model {
         panic!("Black76Model does not support implied volatility calculation yet");
     }
 }
+
+impl OptionStrategy for Black76Model {}

src/options/models/finite_diff.rs

@@ -1,6 +1,6 @@
 //! Module for finite difference option pricing model.
 
-use crate::options::{Option, OptionPricing};
+use crate::options::{Option, OptionPricing, OptionStrategy};
 
 /// Finite difference option pricing model.
 #[derive(Debug, Default)]
@@ -33,3 +33,5 @@ impl OptionPricing for FiniteDiffModel {
         panic!("FiniteDiffModel does not support implied volatility calculation yet");
     }
 }
+
+impl OptionStrategy for FiniteDiffModel {}

src/options/models/heston.rs

@@ -1,6 +1,6 @@
 //! Module for Heston option pricing model.
 
-use crate::options::{Option, OptionPricing};
+use crate::options::{Option, OptionPricing, OptionStrategy};
 
 /// Heston option pricing model.
 #[derive(Debug, Default)]
@@ -33,3 +33,5 @@ impl OptionPricing for HestonModel {
         panic!("HestonModel does not support implied volatility calculation yet");
     }
 }
+
+impl OptionStrategy for HestonModel {}

src/options/models/monte_carlo.rs

@@ -26,7 +26,7 @@
 //! println!("Monte Carlo Call Price: {}", price);
 //! ```
 
-use crate::options::{Option, OptionPricing, OptionStyle, SimMethod};
+use crate::options::{Option, OptionPricing, OptionStrategy, OptionStyle, SimMethod};
 use rand::rngs::ThreadRng;
 use rayon::prelude::*;
 
@@ -202,3 +202,5 @@ impl MonteCarloModel {
         self.simulate_price_paths(option)
     }
 }
+
+impl OptionStrategy for MonteCarloModel {}

src/options/traits/option.rs

@@ -34,6 +34,13 @@ pub trait Option: Clone + Send + Sync {
     /// The time horizon (in years).
     fn time_to_maturity(&self) -> f64;
 
+    /// Set the time horizon (in years).
+    ///
+    /// # Arguments
+    ///
+    /// * `time_to_maturity` - The time horizon (in years).
+    fn set_time_to_maturity(&mut self, time_to_maturity: f64);
+
     /// Get the type of the option.
     ///
     /// # Returns

src/options/traits/option_strategy.rs

@@ -414,7 +414,7 @@
 
     /* STOCK & OPTION */
 
-    /// Buy (long covered call) or sell (short covered call) a pair of ITM (in the money) stock and sell a OTM (out of the money) call.
+    /// Own underlying stock and sell a OTM (out of the money) call.
     fn covered_call<'a, T: Option>(
         &'a self,
         stock: &'a Instrument,
@@ -427,8 +427,8 @@
                 "Stock must be ITM and call must be OTM!"
             );
 
-            let price = stock.spot + self.price(call);
-            let payoff = spot_price + call.payoff(Some(spot_price));
+            let price = stock.spot - self.price(call);
+            let payoff = spot_price - call.payoff(Some(spot_price));
             (payoff, price)
         }
     }
@@ -557,7 +557,7 @@
         }
     }
 
-    /// The iron butterfly strategy involves buying a pair of ATM (at the money) call and put, and shorting a pair of OTM (out of the money) call and put.
+    /// The iron butterfly strategy involves buying a pair of OTM (out of the money) call and put, and shorting a pair of ATM (at the money) call and put.
     /// It is a limited-risk, limited-profit trading strategy structured for a larger probability of earning smaller limited profit when the underlying stock is perceived to have a low volatility.
     fn iron_butterfly<'a, T: Option>(
         &'a self,
@@ -578,12 +578,12 @@
             assert!(otm_put.strike() < atm_put.strike() && atm_put.strike() == atm_call.strike() && atm_call.strike() < otm_call.strike(),
                     "Iron Butterfly must have ordered strikes: lower_put < atm_put == atm_call < upper_call");
 
-            let price = -self.price(otm_put) + self.price(atm_put) + self.price(atm_call)
-                - self.price(otm_call);
-            let payoff = -otm_put.payoff(Some(spot_price))
-                + atm_put.payoff(Some(spot_price))
-                + atm_call.payoff(Some(spot_price))
-                - otm_call.payoff(Some(spot_price));
+            let price = self.price(otm_put) - self.price(atm_put) - self.price(atm_call)
+                + self.price(otm_call);
+            let payoff = otm_put.payoff(Some(spot_price))
+                - atm_put.payoff(Some(spot_price))
+                - atm_call.payoff(Some(spot_price))
+                + otm_call.payoff(Some(spot_price));
             (payoff, price)
         }
     }
@@ -778,6 +778,7 @@
         front_month: &'a T,
         back_month: &'a T,
     ) -> impl Fn(f64) -> (f64, f64) + 'a {
+        log_warn!("Flaky implementation of calendar spread. Use with caution!");
         if back_month.time_to_maturity() < front_month.time_to_maturity() {
             log_warn!("Back month is the front month => continuing with the inverse order!");
             return self.calendar_spread(back_month, front_month);
@@ -791,10 +792,6 @@
                 log_warn!("Options are not ATM. Consider choosing ATM options!");
             }
 
-            if front_month.time_to_maturity() > 0.083333334 {
-                log_warn!("Front month expires in more than 1 month. Consider choosing a shorter expiration date!");
-            }
-
             if back_month.time_to_maturity() - front_month.time_to_maturity() > 0.083333334 {
                 log_warn!("Time to maturity delta is more than 1 month. Consider choosing a shorter expiration date!");
             }
@@ -814,11 +811,6 @@
         back_month_long: &'a T,
     ) -> impl Fn(f64) -> (f64, f64) + 'a {
         move |spot_price| {
-            if back_month_long.time_to_maturity() < front_month.time_to_maturity() {
-                log_warn!("Back month is the front month => continuing with the inverse order!");
-                return self.calendar_spread(back_month_long, front_month)(spot_price);
-            }
-
             if front_month.strike() != back_month_short.strike() {
                 log_warn!("Front month short and back month long strikes are not equal. Consider choosing equal strikes!");
             }
@@ -831,24 +823,25 @@
                 log_warn!("Front month expires in more than 1 month. Consider choosing a shorter expiration date!");
             }
 
-            // Check if back-month long is further OTM than back-month short.
-            if back_month_long.is_call() && back_month_long.strike() < back_month_short.strike()
-                || back_month_long.is_put() && back_month_long.strike() > back_month_short.strike()
-            {
-                log_warn!("Back-month long is not further OTM than back-month short. Consider choosing further OTM options!");
-            }
-
             if (front_month.time_to_maturity() - back_month_short.time_to_maturity()).abs() > 0.0027
             {
                 log_warn!("Time to maturity delta between front-month and back-month short is more than 1 day. Consider choosing a shorter expiration date!");
             }
 
-            if back_month_long.time_to_maturity() - front_month.time_to_maturity() > 0.086073059 {
-                log_warn!("Time to maturity delta between front-month and back-month long is more than 1 month. Consider choosing a shorter expiration option!");
+            // Ensure back-month long expires ~1 month after the front-month
+            let time_delta = back_month_long.time_to_maturity() - front_month.time_to_maturity();
+            if time_delta > 0.086073059 {
+                log_warn!("Back-month long expires more than 1 month after front-month. Consider a shorter expiration!");
+            }
+            if time_delta < 0.080593607 {
+                log_warn!("Back-month long expires less than 1 month after front-month. Consider a longer expiration!");
             }
 
-            if back_month_long.time_to_maturity() - front_month.time_to_maturity() < 0.080593607 {
-                log_warn!("Time to maturity delta between front-month and back-month long is less than 1 month. Consider choosing a longer expiration option!");
+            // Check if back-month long is further OTM than back-month short.
+            if back_month_long.is_call() && back_month_long.strike() < back_month_short.strike()
+                || back_month_long.is_put() && back_month_long.strike() > back_month_short.strike()
+            {
+                log_warn!("Back-month long is not further OTM than back-month short. Consider choosing further OTM options!");
             }
 
             if front_month.is_call() {
@@ -859,12 +852,21 @@
                 check_is_put!(back_month_short);
             }
 
+            // Adjust back-month short time to maturity after front-month expires
+            let mut back_month_short = back_month_short.clone();
+            back_month_short
+                .set_instrument(back_month_short.instrument().clone().with_spot(spot_price));
+
+            // Calculate the net price (cost/debit of entering the trade)
             let price = self.price(back_month_long)
                 - self.price(front_month)
-                - self.price(back_month_short);
+                - self.price(&back_month_short);
+
+            // Compute the payoff at given spot price
             let payoff = back_month_long.payoff(Some(spot_price))
                 - front_month.payoff(Some(spot_price))
                 - back_month_short.payoff(Some(spot_price));
+
             (payoff, price)
         }
     }

src/options/types/american_option.rs

@@ -74,6 +74,10 @@ impl Option for AmericanOption {
         self.time_to_maturity
     }
 
+    fn set_time_to_maturity(&mut self, time_to_maturity: f64) {
+        self.time_to_maturity = time_to_maturity;
+    }
+
     fn option_type(&self) -> OptionType {
         self.option_type
     }

src/options/types/asian_option.rs

@@ -109,6 +109,10 @@ impl Option for AsianOption {
         self.time_to_maturity
     }
 
+    fn set_time_to_maturity(&mut self, time_to_maturity: f64) {
+        self.time_to_maturity = time_to_maturity;
+    }
+
     fn option_type(&self) -> OptionType {
         self.option_type
     }

src/options/types/binary_option.rs

@@ -121,6 +121,10 @@ impl Option for BinaryOption {
         self.time_to_maturity
     }
 
+    fn set_time_to_maturity(&mut self, time_to_maturity: f64) {
+        self.time_to_maturity = time_to_maturity;
+    }
+
     fn option_type(&self) -> OptionType {
         self.option_type
     }

src/options/types/european_option.rs

@@ -74,6 +74,10 @@ impl Option for EuropeanOption {
         self.time_to_maturity
     }
 
+    fn set_time_to_maturity(&mut self, time_to_maturity: f64) {
+        self.time_to_maturity = time_to_maturity;
+    }
+
     fn option_type(&self) -> OptionType {
         self.option_type
     }