An option is a contract that entitles the buyer to buy (call) or sell (put) a predetermined quantity (usually 100 shares) of an underlying security for a specific period of time at a pre-established price. It is called a derivative investment, since the value of the option is derived from the price of the underlying security.

Options have been around for more than 40 years, but they are just now starting to get the attention they deserve. Many investors have avoided options, believing them to be sophisticated and, therefore, too difficult to understand.

Many more have had bad initial experiences with options because neither they nor their brokers were properly trained in how to use them. The improper use of options, like that of any powerful tool, can lead to major problems. Native stock traders may not realize that options are related to stocks but work differently on various levels and thus get burned in the process.

Finally, words like “risky” or “dangerous” have been incorrectly attached to options by the financial media and certain popular figures in the market. However, it is important for the individual investor to get both sides of the story before making a decision about the value of options.

There are four key advantages (in no particular order) options may give an investor:

• Options provide increased cost-efficiency: An investor can obtain an option position similar to a stock position, but at huge cost savings. For example, to purchase 200 shares of an $80 stock, an investor must pay out $16,000. However, if the investor were to purchase two $20 calls (with each contract representing 100 shares), the total outlay would be only $4,000 (2 contracts x 100 shares/contract x $20 market price). The investor would then have an additional $12,000 to use at his or her discretion.
• They are less risky than their underlying stocks because they require less financial commitment than equities, and they can also be less risky due to their relative imperviousness to the potentially catastrophic effects of gap openings.
  Options are the most dependable form of hedge, and this also makes them safer than stocks. When an investor purchases stocks, a stop-loss order is frequently placed to protect the position. When buying an option your max risk is defined by the premium you paid.
• Options have the potential to deliver higher percentage returns: You don’t need a calculator to figure out if you spend less money and make almost the same profit, you’ll have a higher percentage return. When they pay off, that’s what options typically offer to investors.
• The final major advantage of options is they offer more investment alternatives. Options are a very flexible tool. There are many ways to use options to recreate other positions. The use of options also allows the investor to trade the market’s “third dimension,” if you will – no direction. Options allow the investor to trade not only stock movements but also the passage of time and movements in volatility. Most stocks don’t produce large directional moves the majority of the time. Only a few stocks actually move significantly, and they do it rarely. Your ability to take advantage of stagnation could turn out to be the factor deciding whether your financial goals are reached or they remain simply a pipe dream. Only options offer the strategic alternatives necessary to profit in every type of market.

It must be stressed that options trading is a risky exercise and you can potentially lose your entire investment (and more) if you are not careful. We recommend that you spend a few months paper trading along with us to make sure you are familiar with your trading platform and understand how to open and close a trade. You should only start trading options using real money when you are confident in your abilities to participate in the options market.

You can also read up on the various strategies and techniques in our Academy section. A good place to start would be our Option 101, Options 201, and Butterfly courses. We also recommend the Payday Friday Masterclass and the IVTS Intro. We don’t presume to cover every topic related to option trading but we attempt to cover the gamut. If all fails don’t hesitate to shoot us an email and we’ll be happy to provide an answer within a 24 hour time span.

Finding an adequate options broker is highly location dependent and we are unable to offer a specific recommendation. However here are some general recommendations:

• Go for a platform or broker that has zero to the least possible fees and relatively low commissions. It’s not the 1990s anymore and competition among retail brokers is fierce.
• You want to make sure your money is held in a trusted, reputable bank and in a country with great regulation and consumer protection.
• Make sure your broker accepts your home currency or offers fair exchange rates.
• Do not overly focus on margin requirements when selecting your broker. Your capital commitments guidelines should be designed to protect your trading capital and not by the ability to leverage up. Excessive leverage is how retail traders usually get themselves into trouble.
• Please take the time to question your broker on their dispute resolution process and jurisdiction. It’s your hard-earned money and you should feel secure.
• Deposit and withdrawal fees. If there are any it’s usually a red flag that suggests you should deposit your money elsewhere.

While we cannot offer any specific recommendations our video tutorials mainly revolve around ThinkOrSwim and TastyTrade. We keep our own assets there and never have experienced any serious issues in over a decade of trading options. Of course no broker is perfect and it is up to you to choose a firm that is in line with your specific needs and abides by your local regulations and securities laws.

We don’t hold ourselves to a particular schedule as trading options is highly seasonal and market phase dependent. As a rough guide: on average we hold a rotating roster of between 10 to 15 campaigns per month. As part of our own capital commitment guidelines we hold off on taking on any additional risk when our buying power reduction approaches 50% of our account principal. So for example if your trading account amounts to $20k we would recommend to not exceed a buying power reduction of $10k.

Quantitative trading (also called quant trading) involves the use of computer algorithms and programs – based on simple or complex mathematical models – to identify and capitalize on available trading opportunities. At the back end, quant trading also involves research work on historical data with an aim to identify profit opportunities. In quant jargon we call them ‘alpha factors’ but most traders simply refer to this process as ‘identifying an edge’.

Quant trading is widely used at individual and institutional levels for high frequency, algorithmic, arbitrage, and automated trading. Traders involved in such quantitative analysis and related trading activities are commonly referred to as “quants” or “quant traders.”

Today, getting a job at established firms often requires a specialized master’s degree in a quantitative finance (MBA, Ph.D., CFA), unless one is a seasoned trader with proven work experience. Other less experienced younger quants can start at small-sized firms, or start as junior analysts and work their way up over a long period, although it is a fiercely competitive field.

In addition to having a background in finance, mathematics, and computer programming, quants usually bring along expertise in one or more programming languages, familiarity with building and customizing trading systems, ability to access data feeds, background in data mining, research, and analytical abilities.

Quant trading methods are increasingly common among options traders as the days of ‘shooting from the hip’ discretionary trading are long gone. The majority of institutional option traders employ sophisticated algorithmic trading models to plan and execute their trades.

Although options trading is traditionally sought out by intelligent and skilled individuals the majority of retail traders do not have the broad level of skills necessary to employ advanced quant trading techniques.

This is why we at Red Pill Quants endeavor to cut through the ‘fog of war’ by having boiled the process down to its bare essentials via proven quant trading techniques and disciplines that can be easily adopted and mirrored by anyone with a basic knowledge of how to trade options.

Our company’s motto of ‘paint-by-numbers-quant-trading’ sprung from the idea that the best quant traders are not the ones who spend decades studying for an advanced math degree but instead start out with a step-by-step hands-on approach that is focused on live options trading based on established core concepts. Adding more complex quant based theory further down the line is possible but not a necessity to become a profitable options trader.

• • D. E. Shaw
• • Quantitative Management Associates
• • Two Sigma
• • Renaissance Technologies
• • AlphaSimplex Group
• • Capula
• • AQR Capital
• • PanAgora
• • Acadian Asset Management

This list is by no means exhaustive. For example, many multi-strategy hedge funds, while not typically known as Quant Hedge Funds, have significant quantitative strategies that they run as part of their platform.

Consider Highbridge Capital Management, a $29B “diversified investment platform comprising hedge funds, traditional investment management products, and credit and equity investments with longer-term holding periods.”

Among other strategies, Highbridge offers Convertible Bond Arbitrage and Statistical Arbitrage funds, which are typically thought of as more quantitative strategies than some of their other product offerings, which include credit and global macro investments.

Additionally, keep in mind that firms other than Hedge Funds run quantitative trading strategies. Many large banks also do, via proprietary trading divisions.