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#Day #Trading #Options

#Basic Concept - options day trading focuses only on the underlying #mathematics. It does not rely on any #financial predictions, company results, or market direction.
A #realistic approach is to take advantage of occasional pricing inefficiencies that arise in the #options market.
These #distortions can be related to #earnings announcements, expiry week, weekend #theta decay, intraday implied #volatility swings, differences between overnight and #intraday volatility, or news and #rumors.
#New Directions in #Automated Trading

The combined efforts of #institutional traders equipped with supercomputing platforms and millions of sophisticated private #investors with real-time access to #financial markets and news
has created a situation where #inefficiencies are extinguished almost immediately.
As a result, it has become nearly #impossible to find a combination of pricing parameters or #chart #patterns that can be #profitably exploited for any length of time.
Many of these problems are disguised by #backtesting systems that allow #traders to #overoptimize a set of #technical #indicators and rules.
#Trading Volatility Distortions

Overnight (close-to-open), #intraday (open-to-close), and traditional (close-to-close) measures of #volatility can vary dramatically.
These differences can be used to identify #mispriced #options and structure statistically advantaged trades.
#Volatility distortions sometimes vary by #weekday. These calendar effects can help time entry and exit points for certain types of short-term #trades.
The principal goal of an #option #trader is to #arbitrage subtle differences between implied and fair #volatility by structuring positions that capitalize on those differences.
#Options are underpriced during the day and overpriced when the #market is closed.
For the overall #market, across all days, the average 24-hour price change is only 1.2 times as large as the average 6.5-hour #intraday change. Of all the distortions in the #options market, this is clearly the largest.
the most #sensible approach is to structure #positions early in the day and hold them until they are #profitable or the market closes.
The #goal is to avoid owning dramatically overpriced #options during the long #overnight time frame when time #decay dominates and volatility is diminished.
Our goal is to structure #strangles with underpriced #options on #stocks that tend to exhibit higher #volatility than the amount priced into our trade.
This goal is best accomplished by selecting #stocks with very high #intraday to overnight #volatility ratios and avoiding long-term trades in which #time decay begins to dominate.
#Ratio #backspreads (reverse ratios) composed of short #options at a near #strike and a larger quantity of long options at a far strike represent another excellent alternative.
Special #Events

The relative #magnitude of option pricing increases sharply as #expiry approaches.
The market efficiently responds to these distortions by depressing and inflating #option prices in #predictable ways.
These changes can be used as the basis for highly #profitable trades. News events often create brief #inefficiencies as the #market absorbs and responds to new information.
These inefficiencies represent outstanding #trading opportunities that sometimes #persist for several hours
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