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Systematic and Automated Option Trading (Collection) by Sergey Izraylevich, Ph.D., Vadim Tsudikman

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Chapter 1. Development of Trading Strategies

1.1. Distinctive Features of Option Trading Strategies

Developing option trading strategies requires taking into account numerous specificities peculiar to these instruments. In this section we consider three main characteristics that distinguish option-based strategies from other trading systems.

1.1.1. Nonlinearity and Options Evaluation

Options, in contrast to other assets, have nonlinear payoff functions. This should be taken into account while evaluating their investment potential and generating trading signals. Most automated strategies oriented toward linear assets trading generate open and close signals using specially designed indicators. Technical gauges assessing price trends, dynamics of ...

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