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Introduction to Systematic Options Trading: Evaluating, Analyzing, and Profiting from Mispriced Option Opportunities

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This chapter is from the book
Sophisticated options traders need systematic, reliable approaches for identifying the best option combinations, underlying assets, and strategies. In this introduction to their book, Sergey Izraylevich and Vadim Tsudikman explain how they make these approaches widely available for the first time, helping traders to consistently identify subtle price distortions, gaining a clear and consistent advantage over their competitors.

What the Book Is About and Who Should Read It

This book discusses the procedures of multidimensional search, selection, and utilization of potential trading opportunities existing in the options market. It contains no magic rules promising quick and guaranteed enrichment. Instead, you find comprehensive research aimed at discovery and practical application of statistical regularities and probabilistic characteristics of option trading. The aim of our systematic approach is not the creation of ever-winning strategies. Rather we strive to implement a realistic idea—developing a system of algorithms and rules that provide you with statistical advantage over the average market participant. The trading system based on consistent application of the principles discussed in this book enables you to create and maintain positions with high (higher than the market average) expected profits and lower forecast risks.

The substantial part of this book is devoted to the problem of selection. Statistical edge and probabilistic advantages depend on our ability to select the best variants from a great number of available alternatives. The options market is incredibly broad and diverse, whereas promising trading opportunities are rare and hard to identify. To avoid missing the chance to discover these scarce "pearls," an ample quantity of alternatives should be thoroughly estimated and analyzed. Continuous analyses of large data sets covering the entire options market is the only way to identify sparse trading opportunities that can be described as "the best of the available ones." Therefore, the issues related to the development, optimization, and practical application of selection criteria are discussed broadly and examined in depth throughout the book.

This book is intended for you—traders, investors, portfolio managers, theoreticians, and economists—with different grounding level in options and mathematics.

If you are familiar with the basics of statistics and probability theory and have mastered the fundamentals of option trading, you can now proceed to reading this book. For those of you who have no previous experience with options but are familiar with the first two disciplines, we recommend you to start with the appendix in which we list the main definitions and explain the notions and terms that are necessary to understand the contents of the book.

Those who are not familiar with probability theory and statistics have two options. You can start reading without delving into proofs and arguments, focusing rather on patterns and regularities described in the text and on conclusions resulting from them. In this case you must rely on the results presented by the authors and fully trust the validity of their judgments and conclusions. An alternative way, which is to dig into the basics of statistics and probability theory, can enable you to examine the material of the book critically. Even superficial knowledge of the basics of these subjects provides an opportunity to form your own opinion on many important issues of option trading. The first way can take less of your time and effort, whereas the second one allows for getting the most out of this book.

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