Option Trader – Job description
This article written by Akshit Gupta (ESSEC Business School, Master in Management, 2022) presents the job description of an Option Trader.
Options are a type of derivative contracts which give the buyer the right, but not the obligation, to buy (for a call option) or sell (for a put option) an underlying asset at a predetermined price and at a given date.
Option traders are generally hired by investment banks, investment firms, brokerage firms and commercial banks (for the trading of currencies on the foreign exchange).
Work of an option trader
An option trader is responsible to maximize trading revenue and use different hedging strategies to minimize the portfolio risk and prevent capital loss. He/she trades in two types of option contracts namely, call and put options by taking long or short positions (most of the time selling options to clients).
Trading in options is a highly complex work as the option pricing and risk exposure depend on a number of factors which includes the changes in prices of the underlying, volatility, interest rates, time value, etc. To manage his/her option book, an option trader also uses option Greeks, which are financial tools that measure the price sensitivity of option contracts.
These tools help the option traders to understand the market in a better sense and determine which options to trade and when. Option traders also use different quantitative models (such as the Black-Scholes-Merton model in continuous time and the binomial model in discrete time) to price different option contracts and manage their positions.
With whom does an option trader work?
Option traders work in coordination with several teams. These teams are responsible for providing the option traders with underlying data and market inputs. Some of the most common teams that an option trader works with are:
A sales analyst works with the retail or institutional clients of the firm to implement profit generating strategies on the client’s investments. An option trader also works with the sales team of the firm to execute trades based on the clients’ needs.
An option trader also works with the portfolio managers of the firm to manage portfolios of the firm’s clients by implementing hedging strategies based on option contracts.
An option trader also works with the quantitative analysts of the firm to utilise different quantitative models to price option contracts and implement hedging strategies.
Economists and Sector specialists
An option trader trading in indices, equities or currencies, works in tandem with the Economists or sector specialists to predict the macroeconomic trends and gather information about specific sectors and economies
An option trader trading in equities work with the equity researchers of the firm to obtain financial and non-financial data about different equity underlying.
How much does an option trader earn?
The remuneration of an option trader depends on the type of role and organization he/she is working in. As of the writing of this article (2021), an entry level option trader working in a financial institution can earn an average salary of €65,000/year. The option traders also earn high bonuses and commissions which are based on a percentage of the total profits they have generated over the period.
What training to become an option trader?
In France, an individual who wants to work as an option trader is highly recommended to have a Grand Ecole diploma with a specialization in market finance. He/she should possess strong knowledge of financial markets, mathematics, and economics. He/she must understand financial and economic trends and have strong research skills and interpersonal skills.
The knowledge of coding languages like Python and VBA is also a very desirable skill to become an option trader. To work as an option trader, it is advised to start your career as an intern or an apprentice at a French financial institution while pursuing your diploma.
The Financial risk management (FRM) or Chartered Financial Analyst (CFA) certification provides a candidate with an edge over the other applicants while hunting for a job as an option trader.
Relevance to the SimTrade course
The concepts about option trading can be learnt in the SimTrade Certificate:
- By taking the Exchange orders course, you will know more about the different type of orders that you can use to buy and sell assets in financial markets.
- By taking the Market information course, you will understand how information is incorporated into market prices and the associated concept of market efficiency.
- By launching the Sending an Order simulation, you will practice how financial markets really work and how to act in the market by sending orders.
- By launching the Efficient market simulation, you will practice how information is incorporated into market prices through the trading of market participants and grasp the concept of market efficiency.
Hull J.C. (2018) Options, Futures, and Other Derivatives, Tenth Edition, Chapter 10 – Trading strategies involving options, 276-294.
Hull J.C. (2018) Options, Futures, and Other Derivatives, Tenth Edition, Chapter 10 – Chapter 10 – Mechanics of options markets, 235-240.
Investopedia Option trading guide
Corporate Finance Institute Option pricing models
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About the author
Article written in June 2021 by Akshit GUPTA (ESSEC Business School, Master in Management, 2019-2022).