How to Trade Options Like a Quant (Even If You’re Not One)

Key Takeaways

• Trading is fundamentally about buying underpriced assets and selling overpriced ones, similar to retail arbitrage but at a larger scale with more complex valuations.
• A scientific framework removes emotion: propose a hypothesis, seek falsifying evidence, and only trade if the thesis survives rigorous testing.
• Position sizing should reflect your perceived edge, using methods like fractional Kelly sizing to stay conservative and account for estimation errors.
• Exit trades based on thesis falsification, not profit or loss; adopt a 'day zero mentality' to decide if you'd still enter the trade with current information.
• Risk premia like the variance risk premium provide repeatable, structural edges, while inefficiencies are short-lived and harder to exploit consistently.
• Preserving capital is paramount because large drawdowns destroy compounding; treat trading as a business that must survive to seize future opportunities.
• Choose trade structures that capture specific risks at the lowest cost, such as buying stock for directional views or selling straddles for volatility exposure.