This post assumes basic knowledge of Options and Mathematical Expectation. Most of the features that you observe about options are simply due to the fact that they are expiring bets. And the features we observe in option pricing are observed in any other expiring bet. The complicated maths and terminology that surround options can make it …
Read the previous parts of this 101 series on options: There are 2 good reasons to buy put options: Because you think they are cheap Because you want downside protection. You want to use the skewed payoff profile to protect a portfolio against large downside moves without capping your upside too much. The first requires …
In this article, we explore the payoff to holding long options positions. Read the previous parts of this 101 series on options: Payoff Profile of a Long Call So far, we’ve plotted the value of an option at expiration. This is useful (as we’ll see later), but it doesn’t represent our profit and loss from …
Read the previous parts of this 101 series on options: Options have value because the future is uncertain. One thing that is known and always unchanging, however, is the value of a given option contract at expiry. This is the most fundamental thing about an option. Value of a Call Option at Expiration A call …
In the previous article, we discussed what makes an option valuable. At its core, an option is about choice—the choice to buy or sell an asset at a specific price within a set timeframe. In this article, we’ll explore exactly what this means. An option gives the holder the right, but not the obligation, to …
Financial options contracts are really just options. That is, they give us a choice or an option to do something. We’ll go through a simple example of why options are valuable. Let’s say I offer you the option to use my truck. What might the value of this option be to you? Is it Intrinsically Valuable? Maybe you need …
A few years ago, I got deep into the idea of constructing a long/short equity options portfolio based on the kind of simple factor sorts that had been so successful in quant equity. My original intention was to set up an index and license it to fund managers. Of course, there are many reasons why …
If you trade liquid stocks or futures contracts, the first thing you will notice about equity options trading is that the contracts are illiquid and the bid/ask spread is wide. This sucks, but it makes perfect sense. There is only one AAPL stock to trade, but there are a ton of different options contracts trading …
Here’s a thing that I suspect will make money, but that I haven’t yet tested (for reasons that I will explain shortly): Every day, at the start of the trading day, get the SPX straddle price and convert it to an expected SPX price move. Then at the end of the trading day, take the …
Navigating Tradeoffs with Convex Optimisation This is the final article in our recent stat arb series. The previous articles are linked below: A short take on stat arb trading in the real world A general approach for exploiting stat arb alphas Ideas for crypto stat arb features Quantifying and combining crypto alphas A simple and …
