Definition

In Finance, a Trading Strategy is a predifined set of rules to apply.

Usually, this refers to a means used to replicate an option in order to give it an arbitrage free value in the sense that the cost of buying some financial assets to give the same pay off at maturity should give the fair price of the option.

Examples

We should distinguish between: - static trading strategies: one only needs to trade at the beginning and at the end to ensure the payoff. - dynamic trading strategies: between the start and the maturity of the derivative, one needs to trade more than once to ensure the payoff at maturity. A good example is the Constant Proportion Portfolio Insurance (CPPI), but options with intermediary observation dates or digital features checked on a regular basis also fall into this category.