Top Research Papers on Options Trading

Preface to the First Edition. Preface to the Second Edition. CHAPTER 1 Trade and Risk Management. Introduction. The Philosophy of Risk. Truth About Reward. Risk Management. Trade Management. Trading as a Business. SCORE-The Formula for Trading Success. CHAPTER 2 Tools of the Trader. Introduction. Option Value. Option Pricing. Option Greeks and Risk Management. Time Decay. Delta/Gamma. Implied Volatility. Synthetic Positions. Basic Strategies. Basic Spreads and Combinations. Advanced Spreads. The Greeks and Spread Trades. Valuable Derivative Traders Program. Introduction to Trade Adjustments. C...

The term “algorithmic trading of options” refers to slicing and dicing, tick setting, scheduling, and liquidity seeking of orders (which are orders in instruments that happen to be options), which are unique to options and hinge on their derivative nature.

I n a recent article in this Journal, we illustrated the effectiveness of the CRISMA (Cumulative Volume, Relathe Strength, Moving Average) complex technical trading system [Pruitt and White, 19881. That article demonstrates that the arithmetic annualized risk-adjusted abnormal returns realized from stock trading using this system range from 6.13% to 35.65%, depending on the level of transaction costs and the return generating model used. We recognize that few market traders actually purchase equity securities according to trading strategies based upon strategies similar to the CRISMA system. R...

Barrier options traded in the Australian market vary considerably in terms of the extent to which the barrier is monitored and in terms of the location of the barrier level relative to the exercise price. This paper examines the impact of these differences on prices and also on deltas and gammas. We find that it is not possible to generalize results concerning hedge parameter values to all barrier options. We find that options examined by Easton "et al". (2004) do not display discontinuity of deltas at the barrier levels and that their apparent overpricing cannot be attributed to hedging diffi...

This technical note provides a brief introduction to option trading strategies. It covers pay-off diagrams and specifically introduces bull spreads, butterfly spreads and calendar spreads. It also introduces straddles, strips, and strangles.

This paper proves that the optimal exercise time for the holder of an American option depends upon the physical drift of the underlying asset and the utility of the option holder. We illustrate our results by applying them to several families of utility functions, namely the CARA, the HARA, and the expected return. While the option holder maximises his utility, the issuer gains from the difference between the price maximising exercise boundary and the exercise boundary performed by the option holder. We provide the numerical results which describe the effect of the physical drift and the risk ...

This title offers market-tested guidelines to understand the math and determine the profit potential of each option trade. Successful option trading requires that you understand and know how to use the mathematics underlying option prices. "The Mathematics of Options Trading" focuses on that math, providing you with the knowledge you need to both determine expected results of an option trade and calculate the optimum position size before committing capital. Based on never-before-published work and research, this straightforward book includes: clear-cut explanations of volatility and time to ex...

George Fontanills makes it easy for you to master online options trading by walking you through a series of hypothetical trades that demonstrate how to compute the maximum risk, maximum profit, break-evens, and exit alternatives for each strategy.

An option provides a bundle of economic characteristics, including leverage, exposure to the underlying asset, exposure to a particular dynamic trading strategy, and exposure to volatility and jumps. The wide variety of options traded on indexes and large stocks permits investors to select the particular economic characteristics of interest when buying and selling options. We group exchange-traded equity and index options into delta- and maturity-based buckets, which provide dierential exposure to these economic characteristics. We examine the determinants of volume, signed volume, open intere...

type="main"> This study examines options’ market behavior before analysts’ initiations. We find abnormal trading activity in the options market several days prior to the release of analysts’ initiations. Informed traders recognize the content and timing of the initial recommendations. We determine that informed trading is attributed to information leakage rather than savvy investors’ stock-picking ability. We also find a significant information transmission from the options market to the underlying equity market around the event. Our results are consistent with the tipping hypothesis and confi...

Large amount of trading has let the market become volatile, leading to the emergence of volatility instruments in the market to safeguard the risk-averse investors against uncertainties arising out of volatility in asset prices. The basic idea of this paper is to see the effect of VIX, which is a volatility index based on the index option prices; the Index Option (Nifty Option Contracts), whose underlying is an index (Nifty) comprising of many stocks; and the underlying index Nifty, which captures the behavior of the overall equity market. The combined effect of these three indices on open int...

Two traders were bullish on the stock market. The first translated his market opinion into a purchase of S&P 500 futures. The second bought slightly out-of-the-money call options instead. The market moved immediately lower. The futures trader began to feel heat as prices moved downward. Soon, he had to liquidate because the losses and potential losses were too great. The options trader was secure in the knowledge that no mater how low prices went, the trade would lose no more than the original premium paid up front. Prices began to rally. The futures trader had lost some confidence and did not...

Contents Preface Acknowledgements 1 Introduction 2 Conventional Options, Forwards and Greeks 2.1 Call and Put Options and Forwards 2.2 Pricing Calls and Puts 2.3 Implied Volatility 2.4 Determining the Strike of the Forward 2.5 Pricing of Stock Options Including Dividends 2.6 Pricing Options in Terms of the Forward 2.7 Put-Call Parity 2.8 Delta 2.9 Dynamic Hedging 2.10 Gamma 2.11 Vega 2.12 Theta 2.13 Higher Order Derivatives Like Vanna and Vomma 2.14 Option's Interest Rate Exposure in Terms of Financing the Delta Hedge 3 Profit on Gamma and Relation to Theta 4 Delta Cash and Gamma Cash 4.1 Exam...

The following sections are included:IntroductionTraders in Options MarketsProfit DiagramsOptions StrategiesCommon Options Price DataNaked Trades: The Basic Building BlocksHedged StrategiesSpread StrategiesEXTENSION 15.1: Collars, Ratio Spreads, Butterflies, and CondorsEXTENSION 15.2: Reinsurance Contracts and Call SpreadsCombination StrategiesSummaryCasesQuestions and Problems

Section I: Basic Concepts and Strategies. Section II: Option Price Behavior and Volatility. Section III: Trading Strategies. Section IV: Managing Positions. Section V: The Psychology of Trading.

This article studies equilibrium asset pricing when agents face nonnegative wealth constraints. In the presence of these constraints it is shown that options on the market portfolio are nonredundant securities and the economy's pricing kernel is a function of both the market portfolio and the nonredundant options. This implies that the options should be useful for explaining risky asset returns. To test the theory, a model is derived in which the expected excess return on any risky asset is linearly related (via a collection of betas) to the expected excess return on the market portfolio and t...

What is the role played by the option market in price discovery? We answer this question by examining the effect of news events on trading patterns and price discovery in the options and equity markets. Using intraday data on stocks and options and a dataset of over 70,000 firm-specific news events for Dow30 stocks, we find the volume of trading in the options increases almost seven times an hour before news, whereas the stock volume increases by 17%. The average information share of options for Dow30 stocks around news is almost 27%, in contrast to almost 10% in absence of news. For almost 50...

Although it is widely accepted that options implied volatility is a good estimate of market expectations, very little work has focused on the impact of volatility trading on market microstructure. The present article attempts to fill this gap. We develop a multimarket sequential trades model with asymmetric information in which directional-traders and volatility-traders interact strategically. The major finding is that volatility-traders evict directional-traders from the options market. Indeed, we provide conditions under which volatility trades have a positive impact on options bid-ask sprea...

This paper investigates the relationship between option trading behavior and option pricing patterns. We argue that greater active trading in the options market due to investor overconfidence leads to higher volatility and larger discrepancies in option pricing, which may be captured by implied volatility spread and implied volatility skewness. Using two different measures of excess option trading, we find that trading activities are correlated in different ways with volatility, volatility spread, and volatility skewness. We also find that these relationships exist both over time and cross-sec...

The literature documents that the short-selling ban during the financial crisis led to a significant deterioration of options market quality. We examine the impact of single-stock futures (SSFs) trading on options market quality during the short-selling ban period. We show that there is a substitution effect between options trading and SSFs trading during the ban period and SSFs trading fails to complement the trading of put options. Nevertheless, our results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks with...

The literature documents that the short-selling ban during the financial crisis led to a significant deterioration of options market quality. We examine the impact of single-stock futures (SSFs) trading on options market quality during the short-selling ban period. We show that there is a substitution effect between options trading and SSFs trading during the ban period and SSFs trading fails to complement the trading of put options. Nevertheless, our results show that SSFs trading had a significant effect in narrowing the bid-ask spreads of options contracts. Moreover, compared to stocks with...

Thank you for reading demark on day trading options using options to cash in on the day trading phenomenon. As you may know, people have search hundreds times for their chosen novels like this demark on day trading options using options to cash in on the day trading phenomenon, but end up in malicious downloads. Rather than reading a good book with a cup of coffee in the afternoon, instead they cope with some malicious bugs inside their computer.

Designed as an introduction to this popular investment medium, and updated to incorporate changes brought about by the "Big Bang" and "Black Monday", this text includes advice on purchasing and selling traded call options, and information on the various techniques involved.

This chapter discussesOption Mechanics and Trading, which focuses on the mechanics and techniques of option mechanics and trading, and the underlying indicators, which describe the activity in the options market.

Before: OAKES, KEARSE and LEVAL, Circuit Judges.Jonathan Svetkey, Assistant District Attorney, New York City (Robert T. Johnson, District Attorney, Bronx County, Peter D. Coddington and Anthony J. Girese, Assistant District Attorneys, New York City, of counsel), for Respondents-Appellants. Mark F. Pomerantz, New York City (Warren L. Feldman, Rogers & Wells, New York City, David T. Grudberg, Jacobs, Grudberg, Belt & Dow, New Haven, CT, of counsel), for Petitioner-Appellee. This is an appeal from a judgment of the United States District Court for the Southern District of New York, Robert J. Ward...

The options market allows savvy investors to assume risk in a way that can be very profitable, if the right techniques are used with the proper insight. In Trading Options as a Professional, veteran floor trader James Bittman provides both full-time and professional traders with a highly practical blueprint for maximizing profits in the global options market. This peerless guide helps you think like a market maker, arms you with the latest techniques for trading and managing options, and guides you in honing your proficiency at entering orders and anticipating strategy performance. Most import...

This book is a guide to making money with money by focusing on risk, Leverage, and Markets and on the King of Strategies, Thomas More, a Strategy for All Seasons.

In this paper we show that a Kelly trader is indifferent to trade the derivative if and only if the no-arbitrage price is uniquely given by the minimal martingale measure no-arbitrage price, thus providing a natural selection mechanism for option pricing in incomplete markets. We also show that the unique Kelly indifference price results in market equilibrium, in the sense that no Kelly trader can improve the magnitude of his instantaneous Sharpe ratio, by trading the derivative, given the actions of the other market participants.

While this paper does not purport to be exhaustive in identifying a wide range of alternatives, it nevertheless attempts to explore Philippine trade options in the Uruguay Round of Multilateral Trade Negotiations. It attempts to indicate some policy options in the context of the Uruguay Round. It also describes the products or markets, which have apparent importance to the Philippines in the present Round, the priorities the country can take and the new issues that will be covered in the Round. It then suggests some strategies that can be pursued by the Philippines.

Fundamental analysis and technical analysis. Traditional chart analysis. Option trading: real-life practicality. Economic policies affecting stocks trends.

This work demonstrates the ability to recognize a certain class of informed trading exists which is based on private information that cannot be efficiently discounted into stock prices using machine learning algorithms and the rich features available for option markets.

Major shifts in trade policy occurred in East Asia (especially Japan and China) following the Asian financial crisis. A phenomenon of new bilateralism and new regionalism arrangements has emerged. As a member of the ASEAN, the Philippines is now party to new and proposed plurilateral arrangements in the region such as ASEAN-China, ASEAN-Japan, ASEAN-Korea, ASEAN-India and the larger regional grouping of ASEAN10+3 (China, Japan, and Korea). At the same time, bilateral efforts are on the way with Japan engaging in arrangements with separate members of the ASEAN starting with Singapore in 2002. N...

Margin trading was and still is one of the most important aspect of the retail brokerage business. Moreover, margin trading is the real-life representatives of leverage and short position in financial modeling, which is an important part of academic finance. However, most effort has been on explaining its popularity and assessing empirically its effect on the capital market rather than studying the activities itself. This paper explores a new approach of researching margin by taking advantage of the flexibility and extensive framework of option pricing and shows how it could allow for a deep a...

textabstractWe use a sequential trade model to clarify two mechanisms following the introduction of an option that may lead to increased efficiency in the underlying. On the one hand, market makers learn from trades in the option market and set more accurate prices. On the other hand, the proportion of informed traders in the stock market may be altered depending on the informed traders' strategies. If insiders trade a larger fraction than uninformed traders in the stock, for example because the immediate profits in the stock are larger, spreads in the stock widen, and price errors may increas...

Options are tools for managing risk. As financial derivatives, options make financial markets more complete. This article introduces the concept of options, pricing methods and common trading strategies, and uses the trading of AAPL as an example to show the application strategy of options in actual investment, which is a good demonstration for others to understand options trading.

This paper documents the evolution of block trading in the crude oil options market, following the reduction of the minimum permissible block size threshold in October 2012. Block trading, that was sparse prior to this change, currently accounts for over 30% of the trading volume in WTI crude oil options, a large portion of which involves option trading strategies. We compare the execution costs of large/block orders across trading venues before and after the October 2012 regulatory change, in order to gain a better understanding of the factors behind the recent increase in block trading. We f...

Nowadays there are plenty of ways how people can invest their savings in order to increase their wealth in the upcoming future and option contracts are one of the ways to achieve this. It is possible to trade option contracts by using many different strategies that can bring many opportunities for the investors. However, in order to succeed and end up with a profit, relevant steps have to be taken as well as many risks considered. The goal of this article is to create and investigate selected option trading strategies through their implementation in digital trading platform. In order to achiev...

The Making of a Trader. The Marketplace. A Case for Options. Beyond the Basics. From the Short Side. Playing the Broad Market. When to Do What--and Why! Building a Team--The Day-Trading Firm. Getting the Right Tools. What Changes, What Stays the Same. Glossary. Index.

Derivatives research these days is heavily focused on models. This, in turn, leads one to think about individual options, their market and model values and risk characteristics. But much of the actual trading in options and the option positions adopted by many investors are better described in terms of combinations. Every derivatives textbook offers at least a small look at the menagerie of standard and not-so-standard combination positions, such as bull and bear spreads, butterflies, straddles and strangles, and many many more. Yet little research attention is devoted to such positions. In th...

Introduction Nicholas Dunbar Risk. SECTION 1: GENERIC OPTION PRICING. 1 Assets with Jumps Alexander Lipton Citadel Investment Group. 2 Why Be Backward? Peter Carr Ali Hirsa New York University Caspian Capital Management. 3 Corridor Variance Swaps Peter Carr Keith A. Lewis New York University Independent Consultant. 4 What's a Basket Worth? Peter Laurence Tai-Ho Wang University of Rome National Chung Cheng University. 5 Unifying Volatility Models Claudio Albanese Alexey Kuznetsov University of London McMaster University. 6 Smile at the Uncertainty Damiano Brigo, Fabio Mercurio, Francesco Rapisa...

This paper demonstrates that options trading does not have a uniform impact on the volatility of underlying stocks. Although uninformed traders are able to hedge the risk of underlying stocks by maintaining opposite positions in the options market, informed traders hold outright options positions to capitalize on their information. This hedging behavior tends to reduce noise in the stock market, whereas the speculating behavior tends to generate noise in the stock market. As a result, stocks that were originally volatile, i.e., traded primarily by uninformed traders, will be stabilized by the ...

This work uses options’ underlying asset data to train the reinforcement learning model and demonstrates that the most stable algorithm for obtaining high returns is proximal policy optimization (PPO) with the protective closing strategy.

We investigate optimal trading strategies under uncertainty in a nonparametric no-arbitrage framework that is consistent with an arbitrary number of assets. We show that extreme aversion to uncertainty precludes trading, and that preference for uncertainty induces market participation. <br> In an empirical exercise using S&amp;P 500 options, we find that magnitudes of optimal portfolio positions are small when uncertainty is high, whereas risk-based models usually predict the opposite. They also strongly co-move with trading volume. Differences in beliefs modelled through differences in agents...

India has vibrant securities market with strong retail participation that has rolled over the years. Derivatives are risk management instruments, which derive their value from an underlying asset. The underlying asset can be bullion, index, share, bonds, currency, interest etc. Banks, securities firms, companies and investors to hedge risks, to gain access to cheaper money and to make profit, use derivatives. Derivatives are likely to grow even at a faster rate in future. Option contracts are not marked-to-market, and the cash settlement is done when the contracts are expired. The liquidation ...

Abstract To sign option trades as buys and sells, researchers often employ stock trade classification rules including the quote, the Lee and Ready (1991), the Ellis, Michaely, and O'Hara (2000), and the tick methods. Using a proprietary CBOE dataset that reports trade direction, we find that these four rules sign correctly 83%, 80%, 77%, and 59% of all classifiable trades, respectively. These rates are based on separate classifiable samples because each of the four rules fails to classify some trades (e.g., the quote rulecannot classify midspread trades). Outside-quote and reversed-quote trade...

This paper develops a general equilibrium economy in which options are not redundant and studies the impact of heterogeneity in beliefs on option prices and their trading volume. The model builds on the framework in Basak (2000). The model, calibrated to survey data predicts that: the di¤erence in beliefs can account for observed option trading volume; option trading volume is more likely to be driven by changes in di¤erence in beliefs than by wealth shocks; the open interest in options can proxy for di¤erence in beliefs; the model can partly explain the frequencies of violations of one-factor...

The availability of ETF options make more sophisticated trading techniques accessible to a broader segment of the investor population. With options on ETFs, investors are able to hedge market exposure or seek excess return without disrupting the asset allocation mix of their portfolios. And as the benefits of options strategies become more widely known, both the number and appeal of options on ETFs should continue to expand. This article details the ever-widening availability of options on ETFs, with specific attention to the S&P 500® SPDR ETF. In addition, the article provides three examples ...

Several different types of propulsion concepts are discussed: pulsed fission; continuous nuclear fission; chemical; and chemical boost with advanced nuclear fission. Some of the key characteristics of each type are provided, and typical concepts of each are shown.

This article uses a multisector, multicountry, computable general equilibrium model to examine Chile's strategy of "additive regionalism"--negotiating bilateral free trade agreements with all of its significant trading partners. Taking Chile's regional arrangements bilaterally, only its agreements with Northern partners provide sufficient market access to overcome trade diversion costs. Due to preferential market access, however, additive regionalism is likely to provide Chile with gains that are many multiples of the static welfare gains from unilateral free trade. At least one partner countr...

This paper examines whether trading based on market sentiment can explain mispricing in S&P 500 options. We test the heterogeneous agent s option pricing model developed in Frijns et al. (2010), where our agents have different beliefs about the future level of market volatility and trade accordingly. Our agents trade on long-term mean reversion in volatility as well as on exogenous shocks from the underlying market, but we also consider irrational traders, sentimentalists, that incorporate market sentiment into their beliefs. Our option valuation framework is similar to a stochastic volatility...