Option Trading: Pricing and Volatility Strategies and Techniques

Conclusion

Trading is difficult. But it is not a mystical ability and it can be learned. Here we have broken the trading process into the parts that a professional trader needs: an understanding of market structure, an understanding of the instruments he trades, a way to capture edge, and a methodology for managing risk. This is necessary for all traders, not only those who specialize in options. It is also the approach that the large option trading firms have been built upon.

Knowledge of market structure is probably the aspect of this approach that most distinguishes professional traders from amateurs. This is sometimes dismissed as being merely administrative. It certainly is administrative but to be dismissive to this aspect of trading is to invite failure. A solid understanding of infrastructure can directly lead to profits. For example, negotiating a better funding rate than one’s competitors allows a trader to become a lender to other option traders by actively making markets in boxes. Good infrastructure also makes risk control easier. It may seem trivial to have the phone number of one’s clearing firm on hand, but knowing this can easily save money in the event of technical problems. If in doubt, it is better to be overcautious when it comes to such mere administration.

The fact that we need knowledge of options in order to trade them should be obvious. Exactly what knowledge is worth acquiring does not seem to be as apparent. A trader does not need to know how to derive ...