Options Algorithms and Algorithmic Trading of Options

Abstract

The term “algorithmic trading of options” refers to slicing and dicing, tick setting, scheduling, and liquidity seeking of orders (which are orders in instruments that happen to be options). Time Slicing or TWAP-ing an option order is one example. Market microstructure differences between different instruments (such as stocks and options) can have a profound effect on the effectiveness of the algorithm. “Option algorithms,” on the other hand, are unique to options and hinge on their derivative nature. Examples of option algorithms include volatility pegged orders, delta-adjusted limit orders, and volatility dispersion trades.