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Automated Option Trading: Create, Optimize, and Test Automated Trading Systems

Book Description

The first and only book of its kind, Automated Options Trading describes a comprehensive, step-by-step process for creating automated options trading systems. Using the authors’ techniques, sophisticated traders can create powerful frameworks for the consistent, disciplined realization of well-defined, formalized, and carefully-tested trading strategies based on their specific requirements. Unlike other books on automated trading, this book focuses specifically on the unique requirements of options, reflecting philosophy, logic, quantitative tools, and valuation procedures that are completely different from those used in conventional automated trading algorithms. Every facet of the authors’ approach is optimized for options, including strategy development and optimization; capital allocation; risk management; performance measurement; back-testing and walk-forward analysis; and trade execution. The authors’ system reflects a continuous process of valuation, structuring and long-term management of investment portfolios (not just individual instruments), introducing systematic approaches for handling portfolios containing option combinations related to different underlying assets. With these techniques, it is finally possible to effectively automate options trading at the portfolio level. This book will be an indispensable resource for serious options traders working individually, in hedge funds, or in other institutions.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication Page
  4. Contents
  5. Acknowledgments
  6. About the Authors
  7. Introduction
    1. The Book Structure
    2. Strategies Considered in This Book
    3. Scientific and Empirical Approaches to Developing Automated Trading Strategies
    4. Rational Approach to Developing Automated Trading Strategies
  8. Chapter 1. Development of Trading Strategies
    1. 1.1. Distinctive Features of Option Trading Strategies
    2. 1.2. Market-Neutral Option Trading Strategies
    3. 1.3. Partially Directional Strategies
    4. 1.4. Delta-Neutral Portfolio as a Basis for the Option Trading Strategy
  9. Chapter 2. Optimization
    1. 2.1. General Overview
    2. 2.2. Optimization Space of the Delta-Neutral Strategy
    3. 2.3. Objective Functions and Their Application
    4. 2.4. Multicriteria Optimization
    5. 2.5. Selection of the Optimal Solution on the Basis of Robustness
    6. 2.6. Steadiness of Optimization Space
    7. 2.7. Optimization Methods
    8. 2.8. Establishing the Optimization Framework: Challenges and Compromises
  10. Chapter 3. Risk Management
    1. 3.1. Payoff Function and Specifics of Risk Evaluation
    2. 3.2. Risk Indicators
    3. 3.3. Interrelationships Between Risk Indicators
    4. 3.4. Establishing the Risk Management System: Challenges and Compromises
  11. Chapter 4. Capital Allocation and Portfolio Construction
    1. 4.1. Classical Portfolio Theory and Its Applicability to Options
    2. 4.2. Principles of Option Portfolio Construction
    3. 4.3. Indicators Used for Capital Allocation
    4. 4.4. One-Dimensional System of Capital Allocation
    5. 4.5. Multidimensional Capital Allocation System
    6. 4.6. Portfolio System of Capital Allocation
    7. 4.7. Establishing the Capital Allocation System: Challenges and Compromises
  12. Chapter 5. Backtesting of Option Trading Strategies
    1. 5.1. Database
    2. 5.2. Position Opening and Closing Signals
    3. 5.3. Modeling of Order Execution
    4. 5.4. Backtesting Framework
    5. 5.5. Evaluation of Performance
    6. 5.6. Establishing the Backtesting System: Challenges and Compromises
  13. Bibliography
  14. Appendix
    1. Basic Notions
    2. Payoff Functions
  15. Index
  16. Financial Times Press