Trading Options

I trade options on the most liquid US-listed stocks. Over the years, this turned out to be a somewhat rewarding venture, so I continue it as an ongoing business. The trading is done in the style of Black and Scholes. An option position is initiated at the start of a strategy, and is held until the strategy is unwound. This position remains unchanged unless changes in the margin requirements cause it to be reduced. The shares of the underlying stock are traded during the same time frame so that the position is approximately delta-hedged, given the delta computed under an option-pricing model. This trading style is highly unusual for an individual trader. Most individuals cannot pursue it due to lack of knowledge and IT infrastructure needed to compute risk, generate trade ideas and manage other aspects of the business. On the other hand, this trading style is bread-and-butter of derivative trading desks at investment banks, hedge funds and other institutions, and is practiced in trading of options on bonds, foreign exchange, interest rates and, of course, common stock.

My trading business is unique in that I alone manage every aspect. In contrast, in an institutional trading context many people and departments are involved in different aspects such as research, collection of historical data and its storage in a database, placing the trades and managing the aggregate risk of a portfolio, P&L accounting and others.

The business started almost 5 years ago. Several months were spent putting together the first modeling framework and writing programs that keep track of positions. Trading commenced about 4 years ago. I used various models to trade the underlying stock as a hedge for one or more options on that stock. This delta-hedging approach is still being used. It is just like the Black-Scholes framework, except a more sophisticated non-Black-Scholes model is used. So far, this project resulted in a positive total return with an improvement seen over time. The Sharpe ratio, defined as the ratio of the average daily return to the standard deviation of a daily return, has also shown improvement.

I trade options. In the past four years of active operation, this business has produced a return of approximately 50%. Over time, the performance, as measured by the average daily return, and by the standard deviation of a daily return, has shown improvement. The purpose of this site is to talk about various aspects of the trading activity, and describe its future progress. I welcome further inquiries from interested and qualified readers.