Advanced Algos: Outsmarting the

Market, One Algorithm at a Time.: A

Comprehensive Algorithmic Trading
Guide For 2024 Bissette
Visit to download the full and correct content document:
https://ebookmass.com/product/advanced-algos-outsmarting-the-market-one-algorith
m-at-a-time-a-comprehensive-algorithmic-trading-guide-for-2024-bissette/
A D VA N C E D A L G O S
Reactive Publishing

Hayden Van Der Post

Johann Strauss
Vincent Bisset

Reactive Publishing
 CONTENTS

Title Page
Foreword
Introduction
Chapter 1: An Overview of Options Markets
The Emergence of Options Contracts
The Evolution of Options Markets
The Introduction of Electronic Trading
The Role of Options in Modern Finance
Global Options Trading Landscape
1.2. Options Basics
Definition of a Call and Put Option
Intrinsic Value and Time Value of Options
The Concept of Leverage in Options
Moneyness (ITM, ATM, OTM)
1.3. Options Pricing Models
Binomial Options Pricing Model
Black-Scholes Model
Merton’s Extension to the Black-Scholes Model
The Greeks (Delta, Gamma, Theta, Vega, Rho)
Limitations of Classical Pricing Models
1.4. Option Market Structure
Exchange-Traded Options vs OTC Options
Options Market Participants and Their Roles
Market Liquidity and Depth
Bid-ask Spread and Its Implications
Impact of Volatility and Volume on Market Structure
1.5. Risk and Portfolio Management with Options
Understanding Options Risk Profiles
Portfolio Hedging with Options
Income Generation Strategies with Options
Tail Risk Hedging
Diversification Benefits of Options
Chapter 2: Basics of Python Programming
Syntax and Semantic Overview
Data Types, Variables, and Operators
Control Structures: Loops and Conditional Statements
Functions and Modules: The Modular Architecture of Python
Programming
Exception Handling and Debugging: The Art of Graceful
Failure and Resolution
2.2. Object-Oriented Programming in Python
Introduction to Classes and Objects: The Pillars of Python's
OOP
Inheritance and Polymorphism: Specialization and Flexibility
in Python’s OOP
Encapsulation and Abstraction: The Pillars of Protected
Complexity in Python’s OOP
Diving Deep into Python’s Special Methods: The Dunders
Mastering Architectural Elegance: Design Patterns in Python
2.3. Essential Python Libraries
NumPy for Numerical Computing
Pandas for Data Manipulation
Matplotlib for Data Visualization
SciPy for Scientific Computing
Scikit-learn for Machine Learning
2.4 Advanced Python Features
List Comprehensions and Generators
Decoding Decorators and Context Managers
Mastering Concurrency: Threading and Multiprocessing
Harnessing Asynchronous Programming: asyncio in Action
Enhancing Code Clarity with Type Annotations and Static
Type Checking
2.5. Development Environment Setup
The Genesis of a Robust Python Environment
In the Collage of Code: Selecting the Ideal IDE
Mastering the Winds of Change: Embracing Git in Version
Control
Navigating the Repository Labyrinth: The Pivotal Role of Pip
in Package Management
Workflow Best Practices in Python Development
Chapter 3: Analyzing Time Series in Finance
Synchronizing Sequences: Indexing Time Series with pandas
Mastery Over Moments: Handling Dates and Times in pandas
The Alchemy of Aggregation: Frequency Conversion and
Resampling in pandas
Navigating Temporal Tides: Time Zone Handling in pandas
The Alchemy of Intervals: Timedelta Calculations in pandas
3.2. Time Series Descriptive Statistics
The Pulse of the Market: Measures of Central Tendency in
Time Series
The Dynamics of Dispersal: Dispersion and Volatility
Measurement in Financial Series
Unveiling Asymmetry and Tails: Skewness and Kurtosis in
Options Markets
Deciphering Dependence: Autocorrelation in Financial Time
Series
The Keystone of Predictive Models: Stationarity in Time
Series
3.3. Time Series Visualization
The Nuances of Trends: Deciphering Market Direction with
Line Plots
Mastering Market Symmetry: The Power of Histograms and
Boxplots in Financial Analysis
Charting the Terrain of Volatility: Heatmaps as Beacons in a
Sea of Chaos
Illuminating Patterns: Candlestick and OHLC Charts as
Navigational Tools in Market Seas
Engaging the Senses: Interactive Visualization with Plotly
3.4 Time Series Decomposition in Python
Navigating the Currents: Trend Extraction Methods Explored
The Rhythms of Time: Unraveling Seasonality in Financial
Data
Navigating the Ebb and Flow: Cyclical and Irregular
Components in Time Series
Dissecting the Remnants: A Deep Dive into Residual Analysis
The Nuances of Smoothing: Applying the Hodrick-Prescott
Filter
3.5. Time Series Forecasting Models
Moving Average and Exponential Smoothing Techniques
Unveiling the Temporal Fabric: ARIMA and SARIMA Models
Mastery Over Market Turbulence: GARCH for Volatility
Prediction
Machine Learning Approaches (e.g., LSTM)
Evaluation of Forecasting Models
Chapter 4: Options Pricing Models in Python
Implementing the Model in Python
Computing Greeks Using Analytical Methods
Pricing European Options
Sensitivity Analysis of the Black-Scholes Model Inputs
4.2 The Binomial Tree Model for Option Valuation
Constructing Binomial Trees
Pricing American and European Options with Binomial Trees
Incorporating Dividends and Interest Rates in Options
Pricing
Calculating Greeks Using Binomial Trees
Convergence and Stability of the Binomial Model
4.3. Monte Carlo Simulation for Options Pricing
Monte Carlo Simulation for Options Pricing
Pricing Exotic Options with Monte Carlo Simulations
Techniques to Enhance Simulation Efficiency
4.4. Volatility Modeling and the Greek
Understanding Historical versus Implied Volatility
Constructing the Implied Volatility Surface
Improving Greeks Calculation with Volatility Smiles
Modeling Volatility Skew and Term Structure
Hedging Strategies Based on the Greeks
4.5 Numerical Methods and Optimization Techniques
Chapter 5: Statistical Analysis and Machine Learning for
Options Trading
5.2. Regression Analysis for Option Pricing
Linear Regression Models for Price Forecasting
Polynomial Regression and Curve Fitting
Multivariate Adaptive Regression Splines
Error Metrics and Evaluation for Regression
5.3 Classification Algorithms for Trade Signals
Support Vector Machines (SVM)
Decision Trees and Random Forests
Gradient Boosting Machines (GBM)
Performance Measures for Classification (Confusion Matrix,
ROC Curve)
5.4. Unsupervised Learning Techniques
Unsupervised Learning Techniques
Clustering Algorithms
Hierarchical Clustering:
Anomaly Detection (One-class SVM, Isolation Forests)
5.5 Deep Learning for Options Strategies
Neural Networks and Backpropagation
Convolutional Neural Networks (CNN) for Pattern
Recognition
Recurrent Neural Networks (RNN) and LSTM for Time Series
Deep Reinforcement Learning for Dynamic Strategies
Implementing and Training Models with TensorFlow and
Keras
Chapter 6: Advanced Implied Volatility Analysis
The Concept and Calculation of Implied Volatility
Implied Volatility and Options Pricing
Comparison Between Historical and Implied Volatility
Surface, Skew, and Smile Analysis
Implied Volatility as a Market Sentiment Indicator
6.2. Modeling Implied Volatility Dynamics
Stochastic Volatility Models (Heston Model, SABR Model)
Local Volatility Models (Dupire's Model)
Hybrid Models Combining Stochastic and Local Volatility
Calibration of Volatility Models to Market Data
Limitations and Challenges in Volatility Modeling
6.3. Implied Volatility Trading Strategis
VIX-Related Products and Their Uses in Trading
6.4. Volatility Term Structure and Trading
Contango and Backwardation in Volatility Markets
Term Structure Trading Strategies
6.5 Applications to VIX Futures and Options
Quantitative Tools for Volatility Analysis
Developing Custom Volatility Indicators in Python
Utilizing Machine Learning for Predicting Volatility Shifts
Real-time Monitoring of Volatility Indexes
Importance of Implied Volatility in Algorithmic Models
Backtesting Volatility-Based Trading Algorithms
Conclusion
Additional Resources
Sample Trading Programs – Step by Step Guide
Python – Complete Program
Sample Trading Program 1 - Generic
Sample Trading Program 2 - Generic
Sample Trading Program 3 – Interactive Brokers
Sample Trading Program 4 – Meta Trader
 FOREWORD

I
'm excited to present a crucial tool for both traders and
quants. Interacting with Mr. Van Der Post about market
dynamics is a stimulating yet somewhat disordered
experience. His book skillfully simplifies complex financial
theories into pages that are both enlightening and practical.
This book acts as an accurate navigational tool in the
intricate landscape of fintech innovations. Perfect for
students, financial experts, or scholars delving into the
enigmas of finance, Hayden resembles a finance-savvy
Indiana Jones, adeptly showing the significance of Python in
deciphering market enigmas.

The book transcends the technical aspects of options and

algorithms, rendering complicated ideas accessible. It's
comparable to demystifying the core of Berlin's nightlife for
someone unfamiliar with it. No matter your level of trading
expertise, this book offers valuable insights for all. I'm
deeply invested in this book. Hayden's knack for
demystifying trading complexities echoes my experiences in
Berlin, where grasping the local nightlife was as intricate as
making algorithmic trading comprehensible to a techno DJ.
His storytelling prowess renders complex subjects easily
understandable.
Perusing this book is akin to uncovering a wealth of trading
knowledge. You'll traverse complex trading concepts as
effortlessly as a local navigating Berlin's transit system. This
book not only unveils new viewpoints but also boldly paves
the way. So, prepare your preferred drink and brace for a
captivating foray into the realm of finance. It's set to be as
unpredictable, thrilling, and unforgettable as a Berlin night
out. Cheers to your trading adventure!

Johann Strauss
Quantitative Analyst and Financial Technologist
Author of "Machine Learning in Finance: The New Alchemy"
 INTRODUCTION

I
n the exhilarating, fun, stupendous, amazing world of
financial markets, where fortunes pivot on minuscule
decisions and moods fluctuate more rapidly than a
hyperactive day trader, a new breed of market wizards has
arisen. These wizards don't depend on mystical crystal balls
or sheer intuition; instead, they wield the potent tools of
binary code and Python scripts. Enter the dynamic realm of
"Advanced Options Analysis and Algorithmic Trading
Strategies with Python," the definitive guide for those who
trust algorithms over astrological forecasts in the pursuit of
wealth.

As you peruse this book, you'll uncover a trove of insightful

knowledge, blending expert research with practical code
snippets that connect lofty financial theories with the
tangible world of algorithm-driven trading. This book is
more than a manual; it's a map to the coveted treasure of
market dominance, with Python as your faithful ally.

Whether you're a traditional trader poised to exchange your

mystical tools for digital solutions, or a Python-savvy prodigy
eager to decrypt Wall Street's secrets, this book is your
indispensable resource. Immerse yourself in the
complexities of options trading, become intimate with
derivatives, and decipher intricate pricing models. Prepare
for a journey into the digital wilderness where algorithms
rule, executing trades with a precision that astonishes
traditional traders.

Our journey begins with the basics of options theory,

demystifying terms and revealing the exhilarating interplay
of risk and reward. Prepare to acquaint yourself with the
Greeks – not ancient philosophers, but crucial metrics that
indicate how your options respond to market movements.

From these academic foundations, we venture into the

untamed territories of algorithmic strategy. Here, you will
harness the power of Python to create, test, and refine a
diverse array of trading algorithms. Explore backtesting
using historical data, forecast market fluctuations with
machine learning, and delve into various other forms of
financial sorcery.

But hold your horses, this is just the appetizer. The main
course is a feast of insights from trading titans, served up in
bite-sized, easy-to-digest morsels of practical wisdom. Your
journey through these pages is not just a reading spree; it's
the start of your metamorphosis into a financial market
maestro.

So, buckle up for a brain-tingling escapade that transcends

the dull drone of profit and loss. With Python as your steed
and the insights from "Advanced Options Analysis and
Algorithmic Trading Strategies with Python" as your lance,
you're about to joust with the titans of the market. Ready,
set, charge – your slice of the victory pie awaits!
 CHAPTER 1: AN
OVERVIEW OF OPTIONS
MARKETS
1.1 History of Options Trading

O
ptions trading boasts a history stretching back to
ancient times, beginning in the vibrant markets of
Mesopotamia. Tales from this period recount the first
instances of options contracts, laying the groundwork for the
sophisticated derivatives we see today. This historical
narrative of options trading threads its way through the
centuries and across continents, tracing a path of financial
development that covers millennia.

Fast forward to 17th-century Amsterdam, the cradle of

sophisticated financial instruments, where options trading
found a fertile ground. As tulip bulbs rose to the status of
prized assets, the Dutch, with their keen mercantile spirit,
laid the groundwork for what would evolve into a
comprehensive financial market. It was here, amidst the
frenetic trading of tulip futures, that options began to take a
more recognizable form.
The echo of these trading practices reverberated through
the halls of the Dojima Rice Exchange in Osaka, where the
Samurai, paid in rice, devised a system to sell or trade their
future earnings, giving life to the first rudimentary futures
market. Options naturally found their place within the rice
trade, affording merchants the capacity to manage risk
amidst the uncertainty of future harvests.

As we leap into the 20th century, the narrative arc bends

towards Chicago, where the Chicago Board of Trade (CBOT)
and the Chicago Board Options Exchange (CBOE)
established the first regulated environments for options
trading. It was here that standardized contracts came into
existence, creating the liquidity and market structure
necessary for the thriving options markets we know today.

Delving into these historical depths, we not only honor the

ingenuity of our financial forebears but also glean crucial
insights into the evolution of market dynamics.
Understanding this rich history of options trading allows us
to appreciate its complexity and its significance in the er
scheme of finance. It provides essential context for grasping
the nuances that inform modern trading strategies and the
regulatory frameworks that govern today's markets.

With this foundational knowledge, we stand on the

shoulders of history, poised to expand upon the legacy with
the sophisticated tools and analytical prowess that
characterize the current epoch of options trading.
 THE EMERGENCE OF
OPTIONS CONTRACTS
The tale unfolds during the blossoming of commerce in the
medieval fairs of Europe. In these bustling hubs of trade,
merchants and farmers sought methods to hedge against
the unpredictable swings of supply and demand. Amidst the
cacophony of bartering voices, the rudimentary forms of
what we recognize today as put and call options began to
crystallize. These agreements allowed sellers to lock in a
sale price for their goods, providing a safeguard against
plummeting prices, while buyers could secure a purchase
price, insulating themselves from future price surges.

The formalization of these contracts took a significant stride

in the famed coffeehouses of London, which doubled as
informal trading floors in the 1700s. Here, the options
market took a more structured form, as traders began to
deal in these contracts with greater frequency. Though
rudimentary by today's standards, the transactions carried
out in the heart of London laid the groundwork for more
complex financial innovations.

The next chapter in the story of options contracts unfolds

across the Atlantic, where the first recorded instance of
options trading in the United States occurred. In 1792,
under a Buttonwood tree on what would become Wall
Street, the Buttonwood Agreement was signed. This pact
between 24 merchants and stockbrokers established the
trading rules that would eventually lead to the formation of
the New York Stock Exchange. Among these rules were the
provisions for options trading, signaling the practice's
burgeoning legitimacy.

With the industrial revolution in full swing and capital

markets expanding, the tumultuous 19th century saw
options contracts being employed not just as protective
measures but as speculative instruments. This period
witnessed an increased sophistication in the contracts'
structuration, setting the stage for the explosive growth that
would follow.

It is essential to note the innovations and adaptations that

propelled options contracts from their embryonic form to the
complex and multi-faceted instruments we utilize today.
Each step in their emergence reflects the broader economic
and technological shifts of the era, as well as the ever-
present human desire to navigate the uncertain waters of
the future with greater assurance and profitability.

In studying this evolution, we are reminded that the very

essence of options trading is rooted in the fundamental
economic principles of risk and reward. These principles
have steered the financial destiny of traders and institutions
alike, shaping the landscape in which we operate and
setting the scene for the technological advancements that
would revolutionize options trading in the 20th century and
beyond.
 THE EVOLUTION OF
OPTIONS MARKETS
As the wheel of time turned, the financial landscapes of the
20th century became fertile ground for the burgeoning
growth of options markets. This era was characterised by the
advent of formal exchanges dedicated to the trading of
these versatile instruments, facilitating a dramatic
advancement in both their accessibility and complexity.

In the early 1900s, options trading was still largely

conducted over the counter (OTC), with minimal
standardization and a great deal of counterparty risk. The
lack of transparency and regulation made it a market
primarily for the affluent and well-connected. However, the
seed of change was sown in 1973 with the launch of the
Chicago Board Options Exchange (CBOE), the world's first
environment where options on equities could be publicly
traded. This watershed event marked the beginning of
regulated options trading, offering a level of security and
trust that had been absent.

The innovation did not end with the establishment of the

CBOE. The subsequent introduction of the standardized
options contract revolutionized the market. Standardization
meant that options contracts now had fixed strike prices,
expiration dates, and contract sizes, which greatly increased
liquidity and made it easier for a broader spectrum of
investors to partake in options trading. This newfound
uniformity was a boon for both individual traders and
institutional investors, as it reduced the complexities
formerly associated with custom OTC contracts.

The 1980s saw the options markets continue to evolve with

the advent of electronic trading. The emergence of this
digital frontier enabled faster transaction speeds, greater
market efficiency, and an unprecedented expansion of the
global trading community. It was an era marked by a rapid
technological progression that made options trading more
accessible to retail traders, diminishing the dominance of
the professional trading floors.

In tandem with technological strides, the 1990s brought

about the widespread adoption of the Black-Scholes-Merton
model, a mathematical framework that provided an
analytical formula for valuing options contracts. This model
became an indispensable tool for traders, allowing for the
precise pricing of options and the assessment of risk,
thereby streamlining trading strategies and decision-making
processes.

Entering the 21st century, the options markets have

continued to flourish, propelled by innovations in financial
engineering and the proliferation of online trading
platforms. The markets have become more sophisticated
with a plethora of complex products like exotic options and
structured products. Algorithmic trading has risen to
prominence, ushering in a new age where high-frequency
trading and quantitative analysis reign supreme.

Throughout the transformation of the options markets, there

has been an undercurrent of regulatory change aimed at
safeguarding the integrity of the trading environment.
Regulators have worked to ensure fair play and
transparency, while providing a framework that encourages
innovation and healthy market competition.

Today's options markets are a marvel of modern finance, a

far cry from their modest beginnings. They represent a
confluence of historical innovation, evolving technology, and
the relentless pursuit of financial acumen. As traders and
investors continue to navigate these markets, they are
bound by the same principles of risk and reward that have
echoed through the corridors of time, but they are armed
with tools and strategies that past generations could scarce
imagine.
 THE INTRODUCTION OF
ELECTRONIC TRADING
As the dawn of the digital age unfurled its tendrils across
the globe, it was inevitable that the financial markets would
be caught in its transformative grasp. The introduction of
electronic trading in options markets was not merely an
incremental step; it was a seismic shift that would redefine
the velocity and trajectory of market dynamics.

In the mid-1980s, the first electronic trading systems began

to emerge. These systems, rudimentary by today's
standards, signaled the beginning of the end for the
traditional open outcry system, where traders gestured and
shouted their orders on the exchange floor. Electronic
trading platforms offered a stark contrast with their promise
of efficiency, speed, and anonymity.

One of the earliest adopters of electronic trading was the

NASDAQ, which implemented the Small Order Execution
System (SOES), essentially pioneering the era of electronic
markets. This system was designed to facilitate order
execution for smaller market participants, bypassing the
need for direct interaction with market makers.

By the late 1990s, electronic trading had gained significant

traction, and its advantages were becoming irrefutably
evident. The automation of order matching reduced the
likelihood of human error, transactions could be processed
in milliseconds, and traders could participate from anywhere
in the world. This democratization of the trading process
was a game-changer, opening the door for retail investors to
engage with markets that had once been the exclusive
domain of professional traders.

The CBOE was also an early innovator in electronic trading,

introducing its first electronic trading platform, the CBOE
Direct, at the cusp of the new millennium. This platform was
initially designed to complement the open outcry system,
offering electronic executions in parallel with traditional
floor trading. However, as technology advanced and the
market's appetite for electronic trading grew, electronic
platforms began to dominate.

One of the critical breakthroughs was the development of

sophisticated algorithms for automated trading. These
algorithms enabled the execution of complex trading
strategies at speeds unattainable by humans. High-
frequency traders, leveraging powerful computers and ultra-
low latency networks, could now trade on minute
discrepancies in price, often capturing profits in fractions of
a second.

The shift to electronic trading also heralded a new era of

globalization for options markets. Now that trades could be
executed electronically, geographical barriers disintegrated,
allowing for a more interconnected and interdependent
global market. The Asia Pacific Exchange (APEX) and the
European Options Exchange (EOE) began to offer electronic
trading, facilitating cross-border transactions and expanding
the reach of options markets beyond their traditional
confines.
The proliferation of electronic trading platforms led to a
surge in market data volume, providing traders with an
abundance of real-time information. This data, when
harnessed correctly, became a source of power, allowing
informed traders to make swift decisions based on the latest
market movements. Data feeds, once the purview of the
trading elite, were now accessible to the masses, further
leveling the playing field.

As the timeline of finance continued to unfold, electronic

trading became the bedrock upon which modern markets
were built. Its implementation has significantly impacted
market liquidity, allowing for tighter bid-ask spreads and
more effective price discovery. It has also facilitated the
introduction of new financial products and trading
strategies, further enhancing the versatility and depth of
options markets.

Electronic trading has indelibly altered the landscape of

options markets, and its continuing evolution is a testament
to the ingenuity and resourcefulness of financial
technologists. As we peer into the future, it is clear that
electronic trading will continue to be a cornerstone of
market operations, driving innovation and shaping the face
of finance for generations to come.
 THE ROLE OF OPTIONS
IN MODERN FINANCE
In the complex collage of modern finance, options stand out
as versatile instruments whose strategic value cannot be
overstated. They have become the cornerstone of risk
management and speculative endeavors, offering a opus of
possibilities to the keen investor.

A financial option is a contract that bestows upon the holder

the right, though not the obligation, to buy or sell an
underlying asset at a predetermined price within a specific
timeframe. This fundamental characteristic—choice without
commitment—imbues options with a unique risk profile that
can be tailored to suit the specific risk tolerance and market
view of the investor.

One of the primary roles of options in modern finance is to

provide hedging capabilities. As insurance contracts for
portfolios, options can protect against adverse price
movements in underlying assets. A classic example is the
protective put strategy, where an investor holding a stock
can purchase put options to limit downside risk. Should the
stock plummet, the put options will rise in value, offsetting
the losses in the stock position. Conversely, covered call
strategies allow for income generation by writing call
options against stock holdings, offering premium income
while potentially obligating the sale of the stock at the strike
price.
Speculation is another domain where options have gained
prominence. The leverage effect of options enables traders
to amplify their exposure to price movements without
committing substantial capital. For instance, purchasing call
options on a stock that is anticipated to increase in value
can result in significant profits if the stock's price
appreciates above the strike price, with the trader’s risk
limited to the premium paid for the option.

Options also contribute to price discovery in financial

markets. As investors gauge the probability of future price
movements, options pricing can provide insights into market
expectations. The implied volatility embedded in option
prices reflects the market's forecast of the underlying asset's
volatility, serving as a barometer of market sentiment and
uncertainty.

Moreover, options have given rise to complex trading

strategies that can be calibrated for virtually any market
outlook or risk appetite. Strategies such as iron condors and
butterflies allow traders to profit from range-bound markets,
while straddles and strangles can be employed when
significant price movements are expected, irrespective of
the direction.

The roles of options extend into the corporate sphere, where

companies utilize options to manage currency and
commodity price risks. For example, an airline company may
use fuel options to hedge against the volatility of jet fuel
prices, thus stabilizing cash flows and financial planning.

In the institutional sphere, options are integral to portfolio

management. Asset managers employ option strategies to
enhance portfolio returns, manage risk-return profiles, and
provide downside protection. Additionally, options form the
basis of structured products, offering customized payoffs to
meet the specific investment preferences of individuals and
institutions.

Options have also become essential tools in executive

compensation packages. Stock options align the interests of
management with those of shareholders by incentivizing
executives to drive the company's share price upward, thus
tying their rewards to the company's performance.

In summary, the role of options in modern finance is

multifaceted and deeply entrenched. They offer a rich
arsenal of tools for investors to express their convictions,
manage risks, and optimize returns. As financial markets
evolve, so too will the strategies and applications of options,
continuing to shape the contours of the financial landscape.
 GLOBAL OPTIONS
TRADING LANDSCAPE
Navigating the global options trading landscape is akin to
steering through the vast and ever-shifting open sea. It is a
world where diverse trading venues, regulatory
environments, and market participants converge to form a
dynamic ecosystem. Whether one is an individual day trader
or a sophisticated institutional player, understanding this
landscape is crucial for effective strategy implementation
and risk management.

Globally, options are traded on exchanges as well as over-

the-counter (OTC). Exchanges such as the Chicago Board
Options Exchange (CBOE) in the United States, Eurex in
Europe, and the Osaka Securities Exchange in Japan,
provide centralized and regulated marketplaces where
options contracts are standardized with clear specifications
on strike prices, expiration dates, and contract sizes. These
exchanges facilitate transparency, liquidity, and price
discovery, with the added assurance of counterparty risk
mitigation through clearinghouses.

In contrast, the OTC market allows for more tailored

contracts, accommodating the specific needs of
counterparties. Here, options are negotiated bilaterally, and
while this customizability is advantageous for unique
hedging strategies or specific investment goals, it also
brings increased counterparty risk and less transparency
compared to exchange-traded options.

Regulatory frameworks play an essential role in shaping the

options trading landscape. The stringent rules and oversight
in the United States, enforced by entities such as the
Securities and Exchange Commission (SEC) and the
Commodity Futures Trading Commission (CFTC), set
standards for market conduct and investor protection.
Similarly, in Europe, the Markets in Financial Instruments
Directive (MiFID) II aims to increase market transparency
and integrity. Each jurisdiction's regulatory climate has a
direct impact on options trading practices, influencing
everything from reporting requirements to the availability of
certain financial instruments.

The advent of electronic trading has revolutionized the

options markets, making them more accessible and
efficient. The transition from open outcry to electronic
platforms has enabled high-speed trading and global
connectivity, allowing traders to execute complex strategies
with precision and at a fraction of the time once required.

Market participants in the global options landscape vary

widely, from retail investors seeking to hedge investments
or speculate on stock movements, to institutional investors
employing sophisticated strategies for portfolio
management. Additionally, market makers provide liquidity
by quoting buy and sell prices for options contracts,
facilitating orderly trading even in less liquid options.

Propelled by technological advancements, algorithmic

trading has become a significant component of the options
market. Algorithms can analyze vast arrays of market data
to identify trading opportunities, manage risks, or execute
orders at optimal prices. Such strategies can range from
simple automated execution of orders based on predefined
criteria to complex models that involve predictive analytics
and machine learning.

Volatility, as measured by indices such as the VIX (often

referred to as the "fear index"), is a pivotal factor in the
global options market. As it encapsulates market sentiment
regarding future uncertainty, traders closely monitor it to
adjust their options strategies accordingly. In times of high
volatility, options trading can become particularly frenetic,
as traders react to swift market movements and seek to
exploit or hedge against heightened risk.

The global options trading landscape is not without its

challenges. Political events, economic announcements, and
shifts in monetary policy can create ripples or, at times, tidal
waves across the markets, necessitating vigilant risk
management. Furthermore, the disparity in tax treatments
and transaction costs across regions can influence strategy
profitability and must be factored into cross-border trading
decisions.

In conclusion, the global options trading landscape is a

complex network of markets, participants, and regulations.
It requires astute navigation to capitalize on the
opportunities it presents while managing the inherent risks.
As the financial world continues to evolve, staying abreast of
developments within this landscape will be pivotal for all
who engage in options trading on the international stage.
 1.2. OPTIONS BASICS
Options are considered powerful instruments within the
complex landscape of financial derivatives. They possess
versatility in their application and hold strategic potential.
At its core, an option is a contract that bestows upon the
buyer the right, but not the obligation, to purchase or sell an
underlying asset at a predetermined price within a specified
period of time.

At the heart of options trading lies the dichotomy between

calls and puts. A call option provides the holder the liberty
to purchase the underlying asset at the strike price, while a
put option bestows the right to sell. When one anticipates
an asset's price ascent, call options beckon; inversely, put
options become the refuge for expectations of decline.

The anatomy of an options contract is marked by specific

terminology. The strike price, also known as the exercise
price, is the agreed-upon rate at which the underlying asset
may be bought or sold. The expiration date delineates the
temporal boundary of the contract's validity, after which the
right to exercise ceases. Premium, the price paid for the
option itself, reflects not only the intrinsic value but also the
time value—options with more time until expiration typically
command a higher premium owing to the greater
uncertainty and potential for the underlying asset to move
favorably.
The concept of leverage emerges naturally within the sphere
of options. Given that the premium paid for an option is a
fraction of the underlying asset's price, options enable a
trader to control a significant position with a comparatively
modest capital outlay. This leverage magnifies both
potential gains and losses, making risk management a
cornerstone of prudent options trading.

'Moneyness' is the term that captures the position of the

current market price relative to the strike price. An option 'in
the money' (ITM) has intrinsic value—calls where the asset
price is above the strike, and puts where it's below. 'At the
money' (ATM) options have a strike price equal to the asset
price, teetering on the cusp of profitability. Finally, 'out of
the money' (OTM) options possess no intrinsic value; their
worth lies solely in their time value.

Understanding these fundamentals provides a scaffold upon

which more sophisticated strategies and analyses can be
constructed. As traders delve deeper into the nuances of
options, they will encounter a rich landscape of strategies
that cater to diverse risk profiles and market outlooks.
Mastery of these basics is an essential prelude to navigating
the complex interplay of market forces with finesse and
confidence.
 DEFINITION OF A CALL
AND PUT OPTION
Options, those versatile keystones in the archway of
financial derivatives, are instruments encapsulating a opus
of risk and reward. A call option emerges as a beacon for the
bullish—heralding the right to stride into the marketplace
and claim ownership of an asset at the strike price before
the march of time extinguishes the flame of opportunity at
expiration. It's a speculator's wand, conjuring profit from the
asset's ascent, all the while cushioned by the limit of loss to
the premium paid. The leverage inherent in call options can
inflate the speculator's capital, inflating it with the potential
for significant returns.

Conversely, a put option is the harbinger of bearish tidings,

offering the right to part ways with an asset at the strike
price. It's a tool of protection, a financial parachute, allowing
investors to hedge the risk of their holdings or speculate on
the descent of prices without the need to first own the
underlying asset. The put option serves as a bulwark against
downturns, its intrinsic value swelling as the asset's price
dwindles below the strike.

Exploring the essence of these options, one must scrutinize

the anatomy of their valuation. The premium—the price at
which the option is traded—becomes the subject of fierce
scrutiny and strategic calculation. Investors and traders,
equipped with models and market insight, assay this
parameter, weighing the current market price against the
strike, the volatility of the underlying asset, and the waning
time to expiration. Herein lies the alchemy of options
trading, a crucible where market sentiments, statistical
probabilities, and strategic acumen converge.

Call and put options extend beyond mere definitions; they

are the very sinews and ligaments that enable the agility of
portfolios. Like a skilled mariner reading the stars, the
options trader navigates through tumultuous financial seas,
leveraging calls and puts as instruments of both speculation
and insurance. In the forthcoming chapters, we will dissect
these mechanisms further, elucidating the complex
strategies that can be constructed from these fundamental
building blocks.

Let us proceed with the knowledge that the mastery of calls

and puts is not merely academic but a practical prowess to
be wielded with judicious foresight. The narratives of
fortunes made and lost within the options markets
underscore the potency of these instruments—a testament
to their role as arbiters of financial fate.

- Review the text for areas where further detail or

clarification would add value. If identified, please expand on
those areas in the next response. Avoid repetition and strive
for a comprehensive understanding of the topic.

Options Terminology (Strike Price, Expiration, etc.

In the lexicon of options trading, terms are not merely

words; they are the distilled essence of complex concepts,
each carrying the weight of financial implications. To
navigate the options landscape with the acumen of an adept
trader, one must become fluent in this specialized
vernacular.

At the heart of options terminology lies the 'strike price,' the

fulcrum upon which the entire premise of an option pivots. It
is the predetermined price at which an option holder can
either purchase (in the case of a call option) or sell (in the
case of a put option) the underlying asset. The strike price is
the beacon that guides the option's intrinsic value; it is the
benchmark against which all market movements are
measured.

Another cornerstone term is 'expiration,' the horizon line of

the option's lifecycle. It marks the culmination of the
contract, the point at which the right to exercise the option
either fructifies into action or dissolves into worthlessness.
The expiration date is a critical strategic consideration, for
time's inexorable march is a crucial determinant of the
option's 'time value'—a component of the total premium
that erodes as the expiration draws nearer.

Options traders must also be conversant with 'in the money'

(ITM), 'at the money' (ATM), and 'out of the money' (OTM)—
phrases that describe the position of the strike price relative
to the current market price of the underlying asset. An ITM
option has immediate exercise value, an ATM option stands
on the threshold, while an OTM option remains a bet on
future movements to cross the profitability barrier.

The 'premium' is the price a trader pays to acquire the

option itself, a figure influenced by intrinsic value, time
value, volatility, and other market factors such as interest
rates and dividends. It is the gatekeeper to the potential
rewards and risks that options can unlock.
'Volatility,' a term that reverberates through the options
market, measures the intensity of an asset's price
fluctuations. It fuels the engines of option pricing models,
for it is a predictor of uncertainty, and in the world of
finance, uncertainty is the soil in which the seeds of
opportunity are sown.

Lastly, 'assignment' is an event that occurs when an option

writer (the seller) is compelled to fulfill the terms of the
option contract upon exercise by the holder. It is the
culmination of an option's journey from inception to
conclusion, the moment when contractual rights transform
into tangible actions.

These terms form the bedrock of options trading dialogue, a

language that, when mastered, allows traders to converse
with markets, interpret their moods, and anticipate their
whims. As we delve deeper into subsequent sections, we
will expand upon these concepts, examining their interplay
and the strategies they enable. Mastery of this terminology
is not merely academic—it is the very currency of the
options trader, a currency that grants access to the elite
echelons of financial ingenuity.
 INTRINSIC VALUE AND
TIME VALUE OF
OPTIONS
To comprehend the enigmatic beauty of options, one must
dissect the premium into its two core components: intrinsic
value and time value. These twin pillars uphold the
valuation from which all strategic decisions in options
trading stem.

Intrinsic value is the essence of stark reality, the profit that

would be realized were the option to be exercised at this
very moment. It is quantified as the difference between the
underlying asset's current price and the option's strike price.
This value is straightforward for a call option—if the
underlying asset's price exceeds the strike price, the
intrinsic value is positive; for a put option, it is the inverse.
Should the market price and strike price not warrant a
profitable exercise, the intrinsic value is zero—a simple,
harsh truth of the market's current stance.

Conversely, time value is the embodiment of potential, the

premium that traders are willing to pay over the intrinsic
value for the possibility that the option will gain in worth
before expiration. It is a bet on the future, a speculation
rooted in the unpredictable swings of the market. The time
value is a mercurial figure, influenced by the time remaining
until expiration, inherent volatility of the underlying asset,
and a host of other factors like interest rates and dividends.

With the relentless tick of the clock, the time value decays,
an inexorable process known as 'time decay'. As expiration
approaches, the window for the underlying asset to move in
a favorable direction narrows, and the time value
diminishes, often accelerating as expiration looms. This
decay is not linear, but an asymptotic journey towards zero,
with the steepest descent in the final days before the
option's end.

To illustrate, consider a call option with a strike price of $50,

while the current stock price is $55. If the price of the option
is $7, the intrinsic value would be $5—the actual profit if
exercised. The remaining $2 represents the time value, the
potential for additional profit before the option expires.

Traders, thus, must marry the hard facts reflected by

intrinsic value with the speculative nature of time value to
forge a comprehensive assessment of an option's worth.
One cannot exist without the other; together, they form the
market price of an option—the convergence point of rational
assessment and future possibilities.

As we progress, we shall explore how these two valuation

components can be manipulated and modeled to construct
robust trading strategies that can weather the vicissitudes
of market sentiment and capitalize on the confluence of
time and opportunity.

Remember, the intrinsic value offers a glimpse of the

present, while the time value dreams of profit tomorrow;
understanding both is indispensable for the astute options
strategist.
 THE CONCEPT OF
LEVERAGE IN OPTIONS
Leverage, a term that resonates with power and possibility,
finds its strategic zenith within the options market. It is the
mechanism by which options enable traders to amplify their
exposure to underlying assets with a comparatively minimal
capital outlay. In this financial fulcrum, the smallest
movement in the underlying asset can produce
disproportionate effects on an investor's capital, for better or
for worse.

To harness leverage is to understand that the purchase of an

option grants control over a larger amount of the underlying
asset than the capital employed would ordinarily permit.
This control is a product of the option's contract multiplier,
typically representing a significant number of shares of the
underlying asset in the equity markets. Herein lies the
seductive appeal of options: the ability to partake in the
gains of substantial quantities of the asset without
commensurately large investments.

Consider a scenario where a stock trades at $100 per share.

A trader with a bullish outlook might procure 100 shares at
the cost of $10,000. However, by employing options, that
same trader could purchase call options with a strike price
of $100, representing the same 100 shares, for a premium,
say, of $10 per option contract. The total investment is now
$1,000—a tenth of the direct stock purchase amount, yet
with the potential to benefit from gains in the stock's value.

The leverage ratio, a quantifier of this leverage effect,

measures the percentage change in the option's price
relative to the percentage change in the underlying asset's
price. High leverage indicates that even a small change in
the asset's price can trigger a significant change in the
option’s price. This is the dual-edged sword of options
trading—while the prospects of amplified returns are
tantalizing, the risk of magnified losses is an ever-present
shadow.

Time decay intertwines with leverage, affecting the option’s

sensitivity to the movements of the underlying asset. As
expiration draws near, the option's time value dissipates,
often leading to a decrease in leverage. A trader must thus
be keenly aware of the temporal horizon of their options and
the associated decay of leverage.

Leverage also accentuates the importance of volatility. An

asset prone to dramatic fluctuations in price can vastly
increase the value of an option, as the probability of the
option moving in-the-money heightens. The astute trader
must, therefore, balance their appetite for leverage with
their tolerance for risk, for volatility can just as swiftly erode
an option's value.

In the subsequent sections, we shall dissect the complex

relationship between leverage, volatility, and time decay. We
will constellate these concepts into robust analytical
frameworks and strategies, enabling traders to prudently
wield the formidable power of leverage in pursuit of their
financial objectives.
In embracing leverage, the options trader steps into a
sphere where fortunes can be forged with foresight and
precision, leveraging the confluence of market trends and
option dynamics to sculpt a competitive edge in the
financial markets.
 MONEYNESS (ITM, ATM,
OTM)
Moneyness is the term used to describe the intrinsic position
of an option's strike price relative to the current market
price of the underlying asset. It is a fundamental concept
that determines the intrinsic value of an option and
influences the strategic decision-making process of traders
and investors. The moneyness of an option categorizes it
into one of three distinct states: in-the-money (ITM), at-the-
money (ATM), or out-of-the-money (OTM). Each state holds
unique implications for the option holder, which we shall
navigate with precision and acute awareness of the
underlying market dynamics.

In-the-money options (ITM) are those whose exercise would

result in a positive cash flow to the holder. For call options,
this means the strike price is below the current market price
of the underlying asset. Conversely, put options are
considered ITM when the strike price sits above the market
price. These options carry intrinsic value and represent a
real economic advantage to the holder, as they can be
exercised immediately for a gain. Traders often seek ITM
options for their profitability potential, yet they come with
higher premiums due to the value they possess.

At-the-money options (ATM), by contrast, are positioned at

the threshold where the strike price and market price
converge. These options teeter on the edge of profitability,
holding no intrinsic value; their worth is wholly extrinsic,
hinging on the time value and anticipated volatility of the
underlying asset. Such options are sensitive to market
movements, and traders monitor them closely, especially as
the expiration date looms, and the potential for profitability
becomes concentrated in a narrow time window.

Out-of-the-money options (OTM) reside in a speculative

space where the current market price of the asset has yet to
reach the strike price for calls, or has not fallen below the
strike price for puts. These options have no intrinsic value
and are deemed less expensive, rendering them an
attractive proposition for traders with a strong market
conviction or those seeking insurance-like protection for
their portfolios. The allure of OTM options lies in their
leverage potential; a favorable shift in the market can
exponentially increase their value.

Understanding moneyness is crucial for traders, as it affects

the decision to exercise an option, the premiums paid or
received, and the risk profiles of different strategies. A call
option shifting from OTM to ITM signifies a bullish triumph,
whereas a put option making the same transition is a
harbinger of bearish fortunes. As we explore these states,
we will delve into scenarios that reveal how moneyness
affects both the tactical deployment of individual options
and the complex configurations of complex trading
strategies.

The interplay of moneyness with time decay and implied

volatility forms a collage of strategic considerations. An ITM
option, while valuable, may dwindle in worth if its delta
decreases as expiration nears. An OTM option may suddenly
surge in value if market sentiment shifts and implied
volatility spikes. The astute trader must not only understand
the current state of moneyness but also anticipate its
evolution as market conditions and time conspire to shape
the destiny of an option's worth.

In the sections that follow, we will dissect how moneyness

influences the Greeks, impacts the selection of trading
strategies, and interacts with the broader market forces. We
will equip traders with the analytical tools and knowledge to
navigate the spectrum of moneyness with confidence and
strategic acumen, optimizing their positions to align with
their market outlook and risk tolerance.
 1.3. OPTIONS PRICING
MODELS
An exploration of the financial strategies one can deploy in
the options market is markedly incomplete without a
meticulous examination of options pricing models. These
models are the cornerstone for estimating the fair value of
options, serving as the bedrock upon which traders and
quants construct their strategies and make informed
decisions. In this section, we delve into the sophisticated
sphere of these pricing models, starting with the
foundational theories and progressing to the more complex
and nuanced adaptations that have evolved over time.

The Black-Scholes model, formulated by Fischer Black,

Myron Scholes, and Robert Merton, revolutionized the world
of finance by providing a closed-form solution for pricing
European-style options. Grounded in the assumption of log-
normal distribution of asset prices and the no-arbitrage
principle, the model derives an option's price based on
factors such as the current price of the underlying asset, the
option's strike price, time to expiration, risk-free interest
rates, and the volatility of the underlying asset. The
elegance of the model lies in the Black-Scholes formula, a
mathematical expression encapsulating these variables into
a coherent whole, thus allowing traders to gauge the
theoretical value of an option.
While the Black-Scholes model is an invaluable starting
point, it is not without limitations. Real-world market
conditions such as early exercise options, discrete dividends,
and dynamic interest rates led to the development of the
Binomial Options Pricing Model. This model, which employs
a discrete-time lattice framework, allows for the flexibility to
accommodate American-style options and variable
corporate payouts. By simulating the possible price paths of
the underlying asset through a binomial tree—depicting
upward and downward movements—traders can evaluate
the option’s value at each node, tracing back to its present
value.

Further complexities in market behavior gave rise to the

need for models that account for stochastic volatility and
interest rates. The Merton model, an extension of the Black-
Scholes framework, introduces random jumps in asset
prices, capturing the sudden and significant movements
often observed in markets. Meanwhile, the Heston model
allows for a stochastic volatility process, admitting the
reality that volatility itself is not constant but varies over
time.

Central to the practical application of these models is the

computation of the Greeks—Delta, Gamma, Theta, Vega,
and Rho. These risk measures elucidate the sensitivity of an
option's price to various factors: the underlying asset price
changes, time decay, volatility shifts, and movements in the
risk-free interest rate. An accurate estimation of the Greeks
enables traders to hedge their option positions effectively,
tailor their exposure to market dynamics, and capitalize on
temporal or event-induced volatility.

While classical pricing models serve as the linchpin in the

options trader's toolkit, they also set the stage for a candid
Another random document with
no related content on Scribd:
Utetheisa pulchella (Linn.). Farafra, 20/4/12.

Noctuidæ
Chloridea nubigera (Herrsch.). Camp IX, Libyan Desert, 5/4/12.
Euxoa spinifera (Hubn.). Kairowin Hattia, Farafra, 12/4/12.
Agrotis ypsilon (Rott.). Bu Gerara, 4/4/12.
Cirphis loreyi (Dup.). Bu Gerara, 3/4/12.
Athetis flava (Oberth.). Meir, Dirut, Egypt, 17/3/12.
Laphigma exixua (Hubn.). Camp IX, 4/4/12; Bu Gerara, 3-4/4/12;
Meir, Dirut, Egypt, 17/3/12.
Phytometra gamma (Linn.). Kairowin Hattia, Farafra, 12/4/12. Camp
XI, Farafra, 6/4/12; Meir, Dirut, Egypt, 17/3/12.
Leucanitis kabylaria (Bang, Haas.). Kairowin Hattia, Farafra, 10-
12/4/12.
Hypoglaucitis benenotata moses (Stdgr.). Kairowin Hattia, Farafra,
12/4/12.
Anumeta hilgerti (Rothsch.). Kairowin Hattia, Farafra, 12/4/12.

Pyralidæ
Ommatopteryx ocellea (Haw.). Camp XII, 17/4/12.
Syria Kingi (Rothsch.). (spec. nov.) Fifteen miles south of Bir
Kairowin, 14/4/12.
Syria variabillis (Rothsch.). Meir, Dirut, Egypt, 17-23/3/12; Camp II,
23/3/12.
Syria Libyca (Rothsch.). (spec. nov.) Kairowin Hattia, Farafra,
12/4/12.
Heterographis adustella (Rag.). Kairowin Hattia, Farafra, 12/4/12.
Heterographis verburii (Butl.). Camp II, 23/3/12.
Heterographis samaritanella (Zell.). Kairowin Hattia, Farafra,
12/4/12.
Heterographis conversella (Led.). Camp II, 23/3/12.
Nomophila noctuella (Schiff). Camp IX, Libyan Desert, 4/4/12; Bu
Gerara, 3-4/4/12; Camp XI, Farafra, 6/4/12; Camp XII, 7/4/12;
Camp IV, 25/3/12; Camp V, 26/3/12; Meir, Dirut, Egypt, 17/3/12.

Pyraustidæ
Cornifrons ulceratalis (Led.). Meir, Dirut, Egypt, 17/3/12; Camp II,
23/3/12.
Noctuelia floralis (Hmpsn.). Camp II, 23/3/12.

II. IDENTIFIED AT SOUTH KENSINGTON

TINEINA

Gelechiadæ
Aproærema mitrella (Wlsm.). Meir, Dirut, Egypt, 17-18/3/12; Camp II,
Libyan Desert, 23/3/12; Negeb er Rumi, Libyan Desert, 4/4/12.
Seven specimens. (Tests J. H. Durrant.)
Phthorimæa eremaula (Meyr). Dakhla Road, Libyan Desert, 26/3/12;
Bu Gerara, Libyan Desert, 2-4/4/12. Three specimens. (Tests J. H.
Durrant.)

Plutellidæ
Plutella maculipennis (Crt.). Meir, Dirut, Egypt, 16-23/3/12; Camp II,
Libyan Desert, 23/3/12; Dakhla Road, Libyan Desert, 26/3/12; Bu
Gerara, Libyan Desert, 3-4/4/12; Negeb er Rumi, Libyan Desert,
4/4/12; Farafra Depression, Libyan Desert, 6/4/12; south of Bir
Kairowin, 10/4/12. Fifty-three specimens. (Tests J. H. Durrant.)

Tineidæ
Trichophaga abruptella (Wlstn.). Meir, Dirut, Egypt, 17-18/3/12. Two
specimens. (Tests J. H. Durrant.)

DIPTERA

Mycetophilidæ
Macrocera (?) nana (Macq.). Meir, Dirut, Egypt, 20-23/3/12. Three
specimens. (Tests F. W. Edwards.)

Chironomidæ
Chironomus tripartitus (Kieff). Meir, Dirut, Egypt, 17-23/3/12. Two
specimens. (Tests F. W. Edwards.)

Syrphidæ
Syrphus corollæ (Fabr.). Bu Gerara, Libyan Desert, 2-4/4/12. Two
specimens. (Tests E. E. Austen.)

Muscidæ
Musca analis (Macq.). Meir, Dirut, Egypt, 16-20/3/12. Four
specimens. (Tests E. E. Austen.)
Musca angustifrons (Thoms.). Meir, Dirut, Egypt, 16-18/3/12. Two
specimens. (Tests E. E. Austen.)

TACHINIDÆ

Sarcophaginæ
Disjunctis nuba (Wied.). Bu Gerara, Libyan Desert, 4/4/12. One
specimen. (Tests E. E. Austen.)

Anthomyidæ
Fannia canicularis (L.). Meir, Dirut, Egypt, 16/3/12. One specimen.
(Tests E. E. Austen.)
 Trypetidæ
Urellia stellata (Fuessl.). Abu Harag, Libyan Desert, 26/3/12. One
specimen. (Tests E. E. Austen.)

PLANIPENNIA

Chrysopidæ
Chrysopa vulgaris (Schneider). Meir, Dirut, Egypt, 17/3/12; Camp II,
Libyan Desert, 23/3/12; Dakhla Road, Libyan Desert, 26/3/12; Abu
Harag, Libyan Desert, 26/3/12; Bu Gerara, Libyan Desert, 2-
3/4/12; Negeb er Rumi, Libyan Desert, 4/4/12. Twenty-five
specimens. (Tests H. Campion.)

HEMIPTERA

Reduviidæ
Reduvius palliles (Klug). Meir, Dirut, Egypt, 18/3/12. One specimen.
(Tests C. J. Gahan.)

Jassidæ
Chlorita flavescens (Fabr.). Meir, Dirut, Egypt, 20/3/12. Three
specimens. (Tests F. Laing.)

COLEOPTERA

Carabidæ
Stenolophus marginatus (Dej.). Camp II, Libyan Desert, 23/3/12.
One specimen. (Tests G. J. Arrow.)

Dermestidæ
Dermestes frischi (Kug.). Bu Gerara, Libyan Desert, 2/4/12. One
specimen. (Tests G. J. Arrow.)
 Scarabæidæ
Aphodius hydrochæris (F.). Meir, Dirut, Egypt, 17/3/12. One
specimen. (Tests G. J. Arrow.)
Aphodius granulifrons (Fairm.). Camp II, Libyan Desert, 23/3/12.
One specimen. (Tests G. J. Arrow.)
Aphodius sp (?). Meir, Dirut, Egypt, 20/3/12. One specimen. (Tests
G. J. Arrow.)

Tenebrionidæ
Ocnera hispida (Forsk.). Meir, Dirut, Egypt, 20/3/12. One specimen.
(Tests K. G. Blair.)

ORTHOPTERA

Gryllidæ
Gryllotalpa gryllotalpa (L.). Meir, Dirut, Egypt, 17-21/3/12. Two
specimens. (Tests B. Uvarov.)
 APPENDIX III

ROCK INSCRIPTIONS FROM THE LIBYAN DESERT

T HE graffiti shown in the accompanying plates were collected in

the Libyan Desert. The majority of them occurred on the Gubary
road, between the oases of Kharga and Dakhla, or in the hattia
through which this road runs, immediately before entering the oasis
of Dakhla, in its south-east corner.
In many places these rock scribings were extraordinarily
numerous. It is no exaggeration to say that at some of the
recognised halting-places on the Gubary road, where it is the custom
for caravans to rest during the midday heat, or at the end of the
day’s journey, the rocks are so thickly covered with graffiti that it is
almost impossible to walk without treading on them.
The collection does not pretend to be in any way a complete one,
for the signs were mostly copied during a hurried journey in the hot
weather of 1909; there are consequently a considerable number that
have been overlooked.
Unfortunately most of them are cut on the flat horizontal stones by
the roadside; so it was impossible to tell which was their right way
up, as that would obviously depend upon the position with regard to
them occupied at the time by the man who cut them. Some of them,
however, were on more or less vertical surfaces, so that there could
be no doubt as to their correct positions.
Where any of the others have been compared with signs
previously reported from a different locality, from which they differed
only by their position, the angle through which they have to be
turned, to make their position correspond with the signs with which
they are compared, is intended to be taken in a clockwise direction.
 Those scribings that did not occur on the Gubary road, or in the
hattia, were found in the following localities:—

Nos. 230-238 in the northern part of Kharga Oasis, near ’Ain el

Hagar. They were mostly taken from the mouth of a shaft, cut
vertically into a horizontal tunnel, excavated through the rock below
to act as an infiltration gallery, to bring the water from the subsoil
through which it ran to the surface at a lower level.
(Large-size)
 No. 219 was found on a loose block of stone at the foot of a
ruined mud tower in Dakhla Oasis, near Bir ’Ain Sheykh Mufta, about
three kilometres to the south-east of Smint el Kharab.
Nos. 221-228 occurred cut on a small stone ruin known as Qasr el
Kadabya, about five kilometres to the south of the village of Tenida,
in Dakhla Oasis.
No. 224 was seen, at the foot of the wall by a doorway, in a small
stone building at the well of ’Ain Amur, on the more northerly road
from Kharga to Dakhla oases.
In addition to the graffiti shown in the plates, a large number of
rough drawings were seen, which want of time, unfortunately, did not
allow me to copy. Many of them were of subjects that did not admit
of reproduction. Among the remainder were hunting and battle
scenes, drawings of a few boats, or ships—one of which was
obviously intended to represent a dahabya—and, in addition to
numerous pictures of camels, those of horses, mules or donkeys
were unexpectedly numerous, considering the small use that is
made of these beasts in that part of the desert.
Among the animals shown in the hunting scenes were several
ostriches, which, though found in the Sudan, are quite unknown at
the present time in the district where the graffiti were seen. In
addition, horned game were represented in a few places; but it was
impossible to determine the species which were intended to be
represented.
In the battle scenes, the men were armed with bows, shields,
spears and swords. I saw no guns to indicate modern drawings, or
shangamangers that might have pointed to a Sudan origin.
The figures in every case were cut on the surface of the Nubian
sandstone, a substance that is easily scratched with a knife. A
portion of some of the figures given in the plates is shown by means
of a dotted line, intended to show that the part thus outlined is
uncertain, owing to the rock having been chipped, or to some other
cause.
 The Gubary road, where most of the graffiti were found, runs near
the foot of a scarp that shelters it to a great extent from the strongly
predominant northerly winds. But considering the amount of erosion
that takes place during the frequent sandstorms from this quarter,
after making all allowance for the sheltered position of the rocks
upon which these inscriptions occur, their sharp-cut appearance was
remarkable, seeming to indicate that they do not date from a very
remote period.
Nos. 217 and 218, however, were an exception. These two
inscriptions were cut one above the other, about five feet above
ground level, on a vertical surface facing about north-west. The rock
at this point may perhaps have been unusually soft, but both
inscriptions showed most distinct signs of weathering.
 (Large-size)

No. 217 appears to be of special interest, as it seems to be written

partly in primitive Arabic characters and partly in some script, such
as Tifinagh, making use of dotted letters. Inscriptions of this bilingual
character have also been found in the Twat group of oases, in the
Western Sahara, at Ulad Mahmud, in the Gerara District.[26]
The uncertainty as to the correct position of most of these graffiti,
combined with the simple forms that so many of them show and the
rough manner in which they have been drawn, renders comparisons
with other drawings perhaps dangerous, and in any case requires
more expert knowledge than that possessed by the present writer.
But the following notes upon them may perhaps be of interest.
Many of the drawings are unquestionably tribal camel brands, as
an Arab can often be seen cutting his wasm, or brand, on the ground
during a halt, in the same manner as a white man will write his
name.
These wasms are probably of great antiquity, and are said by the
Arabs who use them to date from pre-Mohammedan times. They are
used by the bedawin in a manner analogous to the heraldry of
medieval Europe. Each tribe has its own brand, the junior branches
and offshoots of the clan adopting the original wasm with a
difference, recalling the “marks of cadency” in heraldry.
I was able, with the assistance of my men, to identify the following
brands:—
The circle seen in No. 27 is a wasm of the Hamamla tribe shown
in No. 80 and, with the added stroke, may constitute the brand of
one of its subdivisions.
No. 29 is the wasm of the Khana tribe.
No. 37 of the Jebsia.
No. 43 that of the Zowia. It is curious that this, one of the most
fanatical tribes that have been converted to the tenets of the
Senussia, should make use of the emblem of Christianity as their
badge.
No. 44 may be the brand of the Zoazi tribe that appears in No.
168, and also perhaps in No. 114.
 No. 48, in the position shown, is the wasm of the Ulad ben Miriam,
or, if turned as it appears in No. 158, of a Maghrabi tribe known as
the Malif.
 (Large-size)

No. 75 was said to be the brand of another Maghrabi tribe, the

name of which I was not able to learn.
 No 85 is the mark of the Amaim, which may be also represented
by Nos. 157 and 174.
No. 86, if turned through 180 degrees, would be the wasm of an
Arab tribe from Moab, whose name I could not ascertain.
No. 87 may perhaps be inverted and intended to be the brand of
the Reshaida—a dotted circle surmounted by a cross. Possibly No.
170, though the circle is represented by a square and the figure is
also inverted, may also stand for this wasm.
The Reshaida are an offshoot of the Awazim, whose brand—a
circle and cross, without the “cadency mark” of the dot—appears in
No. 166, with a line added to it on the left-hand side. Reference will
be made to this additional line below. Possibly Nos. 98 and 124 are
also meant for this Awazim brand.
No. 109 is the wasm of the Orfilli tribe.
No. 156 that of the Hassun, said to be an offshoot of a tribe,
whose name I could not ascertain, that have the mark Y for their
brand.
Nos. 172 and 173 are both brands of the well-known Bisharin
tribe.
No. 177 is the mark of the Harb tribe.
No. 179 of the Hawerti tribe.
No. 234 was said by my men to be the brand of a tribe sprung
from another clan whose wasm may be shown in Nos. 73 and 112,
but they were ignorant of the names of both of the tribes.
Many of the other marks shown in the plates are probably derived
from these wasms. The bedawin Arabs are nearly always illiterate,
but are accustomed to communicate with each other by marks
scratched on the ground in the same way that gypsies make use of a
“patteran.” See p. 180 ante.
Such marks, for instance, as No. 50, derived from the Malif wasm,
and 171 and 183, from the brand, are very possibly produced in
this way.
 Many of the simpler signs occurred repeatedly, and in addition the
group shown in No. 2 was seen twice, and that in No. 14 several
times, while the combination No. 25 in one place was repeated no
less than thirty-three times in three horizontal lines. Similar marks to
those No. 95 occurred in several places, generally in groups of three,
placed as shown in the plate.
No. 18, the seal of Solomon, is not uncommonly seen in the rock
inscriptions of the Western Sahara. It takes several forms, each of
which may have a dot in the centre, thus: . Its commonest form
seems to be that shown in No. 18, but sometimes one of the
triangles of which it is composed is drawn with a heavier line than
the other, thus: . It is also represented in at least one case-on the
Col de Zanaga, in the Figuig district—surrounded by a waved line
producing a kind of rosette . In addition to these forms, the false
seal of Solomon, or five-pointed star, constructed by a continuous
line is also seen in this district, but I did not happen to come
across it in the Libyan Desert. These signs are all much used by the
native magicians.
(Large-size)
 No. 88 was apparently the tracing of a leathern sandal and was
lifesize. The outline of both shod and unshod feet, sometimes the
right foot being traced and at others the left, were of not infrequent
occurrence. They are also found in the Western Sahara at Qasr el
Jaj Ahmer, in the Geryville district, and at Guebar Rashim. The
outlines of hands also occur; but I did not see any of the latter in the
Libyan Desert.

Of the other signs, the mark which occurs, in combination with

others, in Nos. 14 and 244, has also been found on the temple of
Soleb, in the midst of an inscription. The sign , No. 74, also
appears here.[27]
Nos. 42, 43 and 49 were reported by the late Mr. Oric Bates from
Marmarica.[28] So, too, were Nos. 63 and 71, if turned through 180
degrees. The small circle that appears as No. 80, and in combination
with other signs in Nos. 9, 27, and in several of the groups shown in
the plates, and also No. 162, if turned through a right angle, also
figure in this collection. Among which, too, is the sign which may
be identical with the mark in the inscription given as No. 219.
In some of the inscriptions found at the Gara esh Shorfa, in the
Aulef district of Tidikelt in the Twat group of oases, the vowel dot
(tagherit) of the Libyco-Berber script is often enclosed by a line that
forms a kind of loop round it, recalling the cartouche frequently used
in modern Tifinagh writing to surround the different words of a
sentence; the is also sometimes enclosed in the same manner,
the letters when thus treated having the following appearance: ,
. The right-hand signs of No. 63 and No. 132, No. 146 and
several other of the graffiti shown in the plates may perhaps be
examples of this practice, which also is very possibly illustrated by
the sign that occurs in No. 219. The cartouche treatment
appears in No. 245.
 Some of the more complicated signs may only be idle scratchings;
drawings, for instance, such as No. 34 are often to be seen upon
blotting pads, being made by some writer during the intervals of his
composition. But such signs as Nos. 16, 142, 148, 149 and 153
recall the curious ligatured monograms sometimes used by the
modern Tawarek in their writings, or the cryptograms, mentioned by
Duveyrier and H. Barth, that the Tawarek women sometimes amuse
themselves by inventing, that can only be deciphered by those to
whom they have imparted the key.[29]
The circles in Nos. 203, 211 and 212 represent small cups about
two inches in diameter and were used perhaps for some game such
as harubga, or possibly for divination in the manner described by
Mohammed et Tounsi.[30] Somewhat similar groups of cups have
been found in the Twat Oasis group at ’Ain Guettara, and also in the
Geryville district, at El Jaj Mohammed and Shellala Dahrania.
Nos. 224—the left-hand portion—242 and 243 probably represent
human beings. In 224 the five fingers of two hands and the long hair
in the star like a mark above them occur in several other undoubted
drawings of figures that were seen, but are not shown in the plates. It
is, however, doubtful whether it is the feet or the hands that are
represented in Nos. 242 and 243. Among the figures that are not
given in the plates, several appeared in which the hair was
represented by dots instead of the lines in No. 224.
Rough drawings of camels were often seen. They are shown in
Nos. 193 and 196, and possibly also Nos. 194, 195 and 131 are
intended to show them. Nos. 193 and 195 may perhaps represent
camels carrying a travelling tent, such as are used by wealthy
women, and sometimes also by men on a journey. No. 193 may
possibly represent a beast with two humps, though these, of course,
are never seen in North Africa. No. 196 apparently carries a rider,
mounted on a riding saddle. Among other creatures appearing in the
plates, No. 210 is presumably a man being swallowed by a
crocodile.
Rough drawings of camels, of a very similar type to those here
reproduced, have been found by Lieut.-Col. Tilho in the oasis of
Harda, in Borku; and I came across others myself in a cave, near
Marsa Matru, on the North Egyptian coast. The latter were found in
conjunction with drawings of a cannon being fired and of a paddle-
wheel steamer, which appeared to be contemporaneous, so
evidently they were of a comparatively recent date.
The drawings of ostriches and the fragments of their shells which
are often to be found in the Libyan Desert, even in the
neighbourhood of the Egyptian oases, has been held to show that
they once existed wild in this part of the desert. But the argument is
by no means conclusive; ostrich eggs used frequently to be brought
from the Sudan by the old slave-trading caravans, who used them as
food, and the drawings no more show that ostriches inhabited this
part than the pictures of boats show that dahaybas once sailed over
the desert in the neighbourhood, say, of Dakhla Oasis. The
occurrence of these, and of drawings of antelopes and other wild
animals, merely show that some of the travellers who used these
roads came from districts where the creatures they represented
could be seen.