Option Trading: Pricing and Volatility Strategies and Techniques

CHAPTER 9

General Principles of Trading and Hedging

To be a good option trader, one must first be a good trader. Sometimes the particular complexities of managing an option position can blind us to this fact. In order to be successful, we have to put ourselves in situations where we can buy low and sell high.

Humans have been trading forever. Despite this, there is no consensus about what good trading practices are. Perhaps when it comes to specifics this is to be expected. By its nature successful trading can destroy the anomalies that make it possible. However, at a more general level we can state the essential characteristics that all successful trades must have. Further, it is almost certainly a better idea to improve upon a method that others have found to be successful than to try to find something completely new.

I want to emphasize the place of this chapter. This is meant to complement innate trading skill, which I certainly believe exists. I do think that a solid grasp of the quantitative analysis of probability and strategies can benefit any trader, but knowing all of these things is not enough to make a good trader. Traders already do a lot of quantitative analyses, often subconsciously. Good traders can read patterns and prices in ways that statistical analysis still finds too hard. As I have stated several times, measurements in markets are very context-dependent, and a good trader often has keen insight into what variables are currently important. Too many quantitatively ...