What is quantitative trading?

Quantitative trading refers to the use mathematical concepts in trading. These concepts used in trading range in complexity, with the simple end consisting of strategies like betting on prices going back to their average price range, with the complex end consisting of strategies like trading the breakdown of correlated assets.

Quantitative trading is one of the last corners of the market where traders are able to consistently profit. It's rule and formula-based nature helps create strategies that are repeatable, not just one-time events. Quantitative trading is incredibly helpful to all market participants, not just traders, as many inefficiencies are captured by these traders which result in a more-efficient market for all.

To give an example of this, let's go over how a trader uses Options-Quant to capture an inefficiency in the options market.

On April 8th, Apple’s ($AAPL) stock price was 170.16 @ 2:57 P.M. The market price for the Jun17 $170 Call was $9.35, but the Jump-Diffusion model predicted that by close, the price should be $8.99. So the option is sold and the trader waits for the price to converge.

Apple stock options
The trader sells 250 contracts for a credit of ~235k.

Selling Apple Call Option

As the market came to a close, the model proved to be accurate and the price converged to the projected price and the trader bought back the calls for a debit of ~225k.

Buying Apple Call Option

In sum, the trader was able to book a profit of nearly $10,000.

Profit from AAPL Trading

This was just one example of how quantitative trading works. Using an options pricing formula from Options-Quant, the trader was able to spot a pricing inefficiency and successfully trade against it. Trades like these are becoming more commonplace in the markets, but with the right tools anyone, large or small, can also trade these strategies.

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