Most textbook examples, and resources online, talk about algorithmic trading of stocks, futures, forex, etc. They cover techniques like cointegration trading, ARIMA analysis, and many other more exotic ways to trade these instruments.

However, one thing I really never see is examples of doing this exactly same thing for options on, say, stocks. Obviously this will be a little more difficult due to the nature of options but it doesnt seem impossible.

Some examples I can (roughly) think of are trying to calculate better values for IV and such, and find mispricings in options that way. But there has to be some strategies based completely on the underlying, using the techniques above (such as ARIMA). What kind of examples of algorithmic trading of options exist?

  • $\begingroup$ automated market-making $\endgroup$ – noob2 Jan 31 '17 at 21:16
  • 1
    $\begingroup$ anything you can sell to a client $\endgroup$ – rupweb Feb 1 '17 at 10:19

One could use a non-normal GARCH model to forecast the unconditional volatility and compare it to the implied volatility.

If you believe that the market prices of European call and put options are too low and you should buy them. If your forecast of implied is less than the current implied volatility, then the market prices of European call and put options are too high and you should sell them.

Nonetheless, options depends on the volatility and the price of the underlying if you are not sure about the price of your stock let's say, one could trade ATM Straddle so you only trade the volatility

Hope it helps