1. Days to Expiry

• Importance: The Days to Expiry, also known as the time to maturity of a contract, directly influences time decay (theta) in options. As the expiry date approaches, the value of the out-of-the-money (OTM) options is lost expediently, significantly impacting the profitability of time-sensitive strategies.
• Consideration in Backtesting: As the contract nears the expiry day, the probability of profit shifts due to intensified theta decay. Directional sensitivity (gamma) also increases as expiry nears, amplifying the potential for rapid price fluctuations. If backtesting doesn't factor in days to expiry, it can miss these critical dynamics, particularly affecting expiry-day trading strategies.
• Strategies Impacted: Short-term traders often select options with fewer days to expiry to capitalise on time decay, while traders opting for options with more time have an opportunity to unfold the trade.

2. Option Type (Call / Put)

• Importance: The option type defines a trade's directional bias. Calls benefit from bullish price movements, while puts profit from bearish movements.
• Consideration in Backtesting: Since calls and puts respond differently to directional moves, omitting this parameter results in inaccurate profit probabilities and risk assessments in backtesting.
• Strategies Impacted: Knowing the option type helps construct strategies that align with the market outlook, such as call spreads for mild bullish views and put spreads for bearish views.

3. Moneyness (In-the-Money, At-the-Money, Out-of-the-Money)

• Importance: Moneyness reflects an option's intrinsic value and the likelihood of expiring profitably. In-the-money (ITM) options have higher intrinsic value and a higher probability of ending in profits, while out-of-the-money (OTM) options are less expensive but more speculative.
• Consideration in Backtesting: Premium decay varies based on moneyness—OTM options experience faster decay near expiry, while ITM options decay slower. Ignoring money in backtesting can lead to inaccurate modelling, particularly near expiry.
• Strategies Impacted: ITM options are often used for higher-probability, lower-reward trades, while OTM options offer greater leverage and risk for speculative trades.

4. Depth (Number of Strikes from At-the-Money)

• Importance: Depth, or the distance of a strike from the ATM option, affects price sensitivity (delta) and overall risk/reward. Closer strikes are more responsive to price changes as they have a higher delta compared to further strikes, which are less volatile but have a lower probability of expiring in the money.
• Consideration in Backtesting: ATM options have higher premiums and more volatility, while OTM options have lower premiums and more stability. Failing to account for depth can obscure the probabilities of different strikes expiring ITM or OTM.
• Strategies Impacted: Deep OTM strikes are often used in high-risk leverage strategies, while strikes closer to ATMs suit balanced risk/reward strategies.

5. Intraday Time Left

• Importance: Remaining time within a trading day influences intraday time decay and volatility. Options generally lose value as the trading day progresses, especially near expiry.
• Consideration in Backtesting: Intraday time left is crucial for estimating whether there is adequate time to generate profit or recover losses. Ignoring this factor treats trades as independent of the time left in the trading session, which can be misleading.
• Strategies Impacted: Scalping and intraday strategies benefit from knowing the remaining time, as intraday volatility and rapid time decay significantly affect options pricing as the session nears close.

6. Intraday Gain of Underlying

• Importance: The underlying asset's intraday performance indicates short-term trends and momentum, which impact options pricing and can guide trader expectations.
• Consideration in Backtesting: This factor captures the underlying movement's magnitude (the difference of open to CMP) and direction on a given day. Ignoring this means overlooking the key intraday magnitude that affects the pricing options.
• Strategies Impacted: Momentum-based strategies depend on intraday gains to validate directional biases, impacting decisions on going long or short and setting entry/exit points.

7. Momentum

• Importance: Momentum is weighted ROC of the last 30 mins with higher weights to the recent data. Momentum is the most commonly used information in directional and direction neutral trading.
• Consideration in Backtesting: This factor captures the underlying movement's short term magnitude and direction on a given day. Ignoring this means overlooking the momentum factor that many would have considered in the strategies.
• Strategies Impacted: Momentum-based strategies depend on short term momentum to validate directional biases, impacting decisions on going long or short and setting entry/exit points.