Option Factors, Greeks, and Momentum Indicators

Summary

The discussion considers whether factor models and momentum strategies used in equities have equivalents in options. It identifies the underlying price, underlying volatility, time to expiration, and interest rates as major influences on option prices. It also points to the Greeks as a way to describe the main sources of option risk and profit and loss.

The response suggests applying the Relative Strength Index to option prices to identify potentially overbought or oversold conditions, with conventional threshold levels. These are brief suggestions rather than a developed options factor model or tested trading strategy. The document gives no empirical evidence, portfolio construction guidance, or discussion of how option-specific exposures affect the reliability of price momentum signals.

Key ideas

• Option prices respond to the underlying price, volatility, time to expiration, and interest rates.
• The Greeks can help describe the risk and profit-and-loss sources of an options position.
• The response proposes RSI thresholds as possible overbought and oversold signals for options.
• The discussion does not present empirical validation of an options momentum strategy.

Tags

# Factor model and trading strategy in options market


# Factor model and trading strategy in options market












We all know that there are many factor models (CAPM, Fama-French 3...) and trading strategies (momentum trading...) in equity market. I wonder whether there are any analogous factor model and momentum trading strategy in option market.

## Answer by Jen H (score 0, accepted)

https://quant.stackexchange.com/a/44968

Options price is mainly influenced by its underlying price, volatility of underlying assets, time until expiration, and interest rates.

There are also momentum indicators that can be used in options trading to identify if the options are overbought or oversold.

For example:Relative Strength Index It measures the speed and change of securities' price movement RSI = 100 – [100 / ( 1 + (Average Gain / Average Loss ) ) ]

RSI >=70, overvalued

RSI <=30, undervalued

## Answer by XYQ (score 0)

https://quant.stackexchange.com/a/44947

factor model is used to help us understanding the risk and pnl source. So for option, you know its risk is mainly determined by the greeks.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.