> ## Documentation Index
> Fetch the complete documentation index at: https://docs.defiloops.com/llms.txt
> Use this file to discover all available pages before exploring further.

# Backtesting a hedge

> What an option structure would have done, rolled through years, and why its total reaches -100% by construction

**Tool:** `backtest_options`

For "what would this have done", and only then.
[price\_options](/tools/price-options) answers what protection costs now and
whether that is dear or cheap; this answers what the same shape did over years of
rolls. They are different questions and they used to be one answer.

<Note>
  They were split because everything that read them confused the two. The study's
  opening price is 2021 by default, at a volatility index of 117.8 against a recent
  51.8, and it was quoted as the current price, including once to somebody told a
  $1,000 hedge runs $343 a year when it was nearer \$118.
</Note>

## What it answers

```
Protective put on ETH: strike 0.8x spot, 365d rolls, $1,000, ROLLED THROUGH HISTORY.

  from 2021-05-05: 3.0 years, 3 rolls, 0 of them paid more than they cost
  premiums paid   $1,056
  payoffs         $56
  total           -100.0%   against -10.9% for simply holding ETH
  worst drawdown  100.0%

  That total is the return on money spent ENTIRELY on options and rolled:
  every roll buys as many as the budget affords. It reaches -100% for any
  structure that only buys premium, from every start date, which is a
  property of the model rather than a forecast about the asset.

  Cover cost 34.3% of the position at that start, when the index read 117.8.
  TODAY it is 11.8%. 2.9x cheaper, 66% less.
```

## The total is not a loss anybody would take

Read the sentence under it. The model spends the **whole budget** on premiums
each roll and reinvests only what the options paid: the first roll's cost is the
entire capital, the second roll's cost is the first roll's payoff.

So any structure that only buys premium returns **-100% from every start date**.
2021, 2022, 2023, 2024 all give the same answer. That is the fate of a premium
budget, not the return of a hedged portfolio, and not a forecast about the asset.

The cost of hedging a position you hold is the `COST NOW` line in
[price\_options](/tools/price-options).

## Read `won` next to the total

A result is a series of rolls: open, hold to expiry, settle, reopen. `won`
counts how many paid more than they cost. A respectable total can come from one
lucky roll in ten, and the two readings are very different bets.

## It prints its own price against today's

Every answer ends with what cover cost at the study's start, what it costs now,
and the multiple between them. That is there so the study cannot be mistaken for
a quote, which is the specific confusion that split these two tools apart.

## The skew is a choice, and it moves everything

The same caveat as [price\_options](/tools/price-options): the skew is an
assumption, not a measurement, and it is the largest lever on every figure. Every
answer states the one it used.


## Related topics

- [Backtesting a position](/tools/run-lp-backtest.md)
- [Pricing a hedge](/tools/price-options.md)
- [DeFiLoops](/index.md)
- [The catalogue](/adapters/catalogue.md)
- [A live option quote](/tools/price-option-live.md)