Options Pricing
An option's value comes from the spot price, strike, time to expiry, interest rates and expected volatility. Every input except volatility is observable, which is why options trading is in practice a disagreement about volatility.
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Pricing uncertainty rather than direction.
Options let you take a position on how much a market will move rather than which way. That makes volatility itself the traded quantity, and it introduces a set of sensitivities that have no equivalent in spot trading.
This page is background rather than a product description: Liquid Edge does not currently run options strategies, and the concepts still matter because options positioning moves the spot and perp markets we do trade.
Implied Volatility
The volatility figure that makes a pricing model produce the option's actual market price. It is the market's forecast of future movement, and it is usually higher than what subsequently occurs, which is why systematically selling options has a positive expected value and an ugly tail.
Volatility Surfaces
Implied volatility plotted across strikes and expiries. It is not flat: far out-of-the-money options typically price higher volatility, producing the skew or smile. The shape tells you where the market is paying most for protection.
Options Greeks
The sensitivities of an option's price. Delta is sensitivity to spot, gamma is how fast delta itself changes, theta is decay as expiry approaches, and vega is sensitivity to implied volatility. Managing an options book is mostly managing these rather than the price.
Gamma Exposure
The aggregate gamma held by market makers, who hedge dynamically. When they are short gamma they must buy as price rises and sell as it falls, amplifying moves. When long gamma they do the opposite, damping them. This is a real mechanical force on spot price around large expiries.
Delta Hedging
Neutralising directional exposure by holding an offsetting spot or futures position, then rebalancing as delta shifts. It is how a trader isolates a volatility view from a price view, and the rebalancing itself generates flow that moves the underlying market.
Volatility Analysis
Studying how much a market moves, regardless of instrument. Realised volatility is measured from past prices, implied volatility is forecast from options. The gap between them is itself tradeable, and both are useful for sizing positions in any strategy, not just options ones.
Liquid Edge
Where this touches Liquid Edge
For now, options trading cannot be run on our infrastructure, and saying otherwise would be inaccurate. Volatility as a measurable quantity is already central to what the platform does, and options positioning is context worth understanding for anyone trading perps. Longer term, the plan is to let bots deploy onto brokers and platforms that do offer options, so an options leg can be automated the same way a perp leg is today.
- Volatility measures such as ATR are available in the Strategy Studio for sizing and filtering
- The Theta Harvester strategy is named for time decay but trades the venues we support, not options books
- Large options expiries are a known source of spot volatility, which is context for a strategy's risk settings
- Automating options through brokers that support them is on the roadmap, not a capability we claim today
Liquid Edge
Trade the spot and perp moves that options positioning creates.
Paper trade it first, go live when the numbers convince you.
- Options Pricing
- Implied Volatility
- Volatility Surfaces