How Do Smart Traders Make Money?

Faulty Prices

Here’s how hedge funds and investment banks always seem to buy and sell options at the shockingly best prices: ‘Type W’ models. When you buy/sell options, you are usually making the trade based on whatever price you see on screen, or with the help of an indicator. But unbeknownst to many, options prices are forecasted and settled long before your trade is even an idea. It may sound incredulous, but allow me to explain.

Hedge funds like Point72 and Citadel all agree to post-market settlement prices. These are blocks of options trades that get transacted at the exact moment the market closes. Ever wonder why there’s so much volume exactly at the close of the bell? Well, that’s why. The funds do this because they are primarily using options to hedge, rather than speculate, so deciding on a fixed value ahead of time is a great way to minimize volatility.

Here’s an example of the kind of sophisticated software these funds use (retail trader version):

Options Pricing For Retail Traders

How They Make Fortunes From It

As pictured, they rotate their pricing models based on different market trends. You may have even heard of one, likely the Black-Scholes model. In high inflation periods like now, banks and funds use Implied Volatility and Merton-73 models to calculate the ‘true’ options values.

This type of modeling is also how fund managers develop these seemingly crazy trade ideas. A few major ones that you’d find in use today are relative value trades and volatility arbitrage. For relative value trades, since they have an idea of what the price should be based on their models, they can look for overpriced options and sell them to collect the spread when it goes back down to true value. Volatility arbitrage works the same way, but instead, they capture the spread of True Volatility — Implied Volatility. As you can see, these models exist for everything from futures, to stocks, to bonds.

With Options-Quant, you have access to the Jump-Diffusion model and hundreds like it. Our team of traders, statisticians, and economists, we offer direct and practical guidance on branching into systematic strategies with our platform. Whether you want to trade a form of arbitrage, exploit an inefficiency, or even just want to learn and test new strategies, we are here to provide 1-on-1 support.

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What is this platform?

The Options-Quant platform is an options pricing engine that is used to calculate inefficiencies in option prices according to various different pricing models. This includes options on futures, FX, equities, and fixed income. The models featured are used in various hedge funds, and are curated by researchers at leading Universities.

How do I use it?

Upon purchasing, you will receive a digital download of the application as well as a robust documentation that outlines the concepts, explaining how each function works.

E.g.; The overwhelming majority of our users make trades based on the model value of the option relative to the current market price. If MertonJumpDiffusion model estimates the price of an option to be lower than what the market price is trading at, the trader shorts the option and vice-versa. This strategy, also known as relative value trading, uses the platform to exploit pricing inefficiencies.

Can I make trades on the platform?

Currently, the platform is only meant for pricing the options. To submit trades you must use a third-party brokerage, like Robinhood or TD Ameritrade.

Which operating systems are supported?

Currently, we only offer the platform on Windows devices.

Does the platform use any external data?

The platform relies only on user-entered parameters. It does not connect to any external data source or API.