Synopses & Reviews
Praise for VOLATILITY TRADING“Written by s mathematically literate trader, this concise guide is full of valuable insights –not just for volatility traders but for quantitative traders too. From Zakamouline's optimal delta-hedging approximation to Browne's optimal trade-sizing policy, there is much interesting technical material that is put to work to provide a framework for thinking clearly about practical problems such as: When should we hedge? Should we double up or cut or position? How much capital should we allocate to a trade in the first place? This book raises the discussion of quantitative trading to a new level and I strongly recommend it.”—Jim Gatheral, author of The Volatility Surface: A Practitioner's Guide
“Euan Sinclair’s Volatility Trading fills a neglected gap in financial literature on trading volatility with options and updates and expands on basic works with contemporary strategies, insights, and technical detail. Volatility Trading is uncommonly clear, examples are well chosen, and explanations are thorough without being tedious. Not since Allan J. Baird's Option Market Making has there been a work on volatility strategies as well written and practical. Sinclair's modern treatment is a tremendous resource for options market makers and clients alike as they inescapably take a view on volatility with each position. Volatility Trading is destined to become a classic and is highly recommended for students and practitioners alike.”—James N. Ward, Head of High-Yield Investments, AXA Investment Managers Paris, and Professor of Finance, The American University of Paris
“I wish this book had been available when I started. I had to discover its contents the hard way. It nicely illustrates what successful plain vanilla option trading is all about: a sound quantitative approach coupled with a few robust principles. It also should help to dispel the myth surrounding volatility trading: that is an obscure and highly complex field of phynancial voodoo that only a gifted few have the ability to understand and master.—FDAXHunter, founding member of nuclearphynance.com
“Euan Sinclair provides a unique and valuable insight into the art and science of option trading. With clarity and purpose, he demonstrates how the successful option trader judiciously selects the appropriate quantitative tools for the job–neither too rudimentary nor too complex but just right for each stage of the trading process. I strongly recommend this book to volatility traders and all options who wish to see 'behind the curtain' of option pricing.”—Carl Mason, Chief U.S. Equity Derivatives Strategist, Morgan Stanley
Synopsis
Successful trading, says Euan Sinclair, is about developing a consistent process. You must have a goal; you must find trades with a clear statistical edge; you must capture that edge and size each trade in a way that is consistent with your goal. Everything else you do must be done within this framework.
In Volatility Trading, Sinclair offers you a quantitative model for measuring volatility in or-der to gain an edge in your everyday option trading endeavors. With an accessible, straightforward approach, he guides traders through the basics of option pricing, volatility measurement, hedging, money management, and trade evaluation. In addition, Sinclair explains the often-overlooked psychological aspects of trading, revealing both how behavioral psychology can create market conditions traders can take advantage of—and how it can lead them astray. Psychological biases, he asserts, are probably the drivers behind most sources of edge available to a volatility trader.
Your goal, Sinclair explains, must be clearly defined and easily expressed—if you cannot explain it in one sentence, you probably aren't completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn't trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals.
As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful. This book, and its companion CD-ROM, will provide that knowledge. The CD-ROM includes spreadsheets designed to help you forecast volatility and evaluate trades together with simulation engines.
Synopsis
An accessible guide to vital financial models that cover options pricing, trading, and position sizing
Written by quantitative options trader Euan Sinclair, Volatility Trading helps readers measure volatility in order to gain an edge in their everyday option trading endeavors. No other book on the market addresses this topic in such a straightforward and accessible manner. Chapters include information on: truly understanding the Black Scholes equation in order to profitably trade; hedging risk so that it's seen as realized volatility; measuring results through a number of trade evaluation techniques; and the psychological issues facing both novice and experienced traders. A companion CD-ROM is also included with this book, offering traders valuable spreadsheets and other resources.
Euan Sinclair, PhD (Chicago, IL) is an option trader with over ten years of experience trading options professionally. He specializes in design and implementation of quantitative trading strategies.
Synopsis
Successful trading, says Euan Sinclair, is about developing a consistent process. You must have a goal; you must find trades with a clear statistical edge; you must capture that edge and size each trade in a way that is consistent with your goal. Everything else you do must be done within this framework.
In Volatility Trading, Sinclair offers you a quantitative model for measuring volatility in or-der to gain an edge in your everyday option trading endeavors. With an accessible, straightforward approach, he guides traders through the basics of option pricing, volatility measurement, hedging, money management, and trade evaluation. In addition, Sinclair explains the often-overlooked psychological aspects of trading, revealing both how behavioral psychology can create market conditions traders can take advantage of—and how it can lead them astray. Psychological biases, he asserts, are probably the drivers behind most sources of edge available to a volatility trader.
Your goal, Sinclair explains, must be clearly defined and easily expressed—if you cannot explain it in one sentence, you probably aren't completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn't trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals.
As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful. This book, and its companion CD-ROM, will provide that knowledge. The CD-ROM includes spreadsheets designed to help you forecast volatility and evaluate trades together with simulation engines.
Synopsis
The key to this volatility book for traders is its unique positioning. It is a quantitative modeling book for options traders. No other book on the market presents these topics for traders as simply as Sinclair’s. Chapters include content on: truly understanding the Black Scholes equation in order to profitably trade; volatility measurement and forecasting to compare the volatility of the market vs. trader’s forecasts; hedging risk so that it’s seen as realized volatility; an understanding of implied volatility dynamics to help traders hone their timing and execution; trade sizing information to show traders how different choices can dramatically affect their returns; measuring results through a number of trade evaluation techniques other than just profit/loss; and the psychological issues facing traders, from novice to experienced pro. Finally, the CD-ROM offers traders valuable spreadsheets that include calculating volatility cones for different time periods with easy data downloads from Yahoo!
Synopsis
In
Volatility Trading, Sinclair offers you a quantitative model for measuring volatility in order to gain an edge in your everyday option trading endeavors. With an accessible, straightforward approach. He guides traders through the basics of option pricing, volatility measurement, hedging, money management, and trade evaluation. In addition, Sinclair explains the often-overlooked psychological aspects of trading, revealing both how behavioral psychology can create market conditions traders can take advantage of-and how it can lead them astray. Psychological biases, he asserts, are probably the drivers behind most sources of edge available to a volatility trader.
Your goal, Sinclair explains, must be clearly defined and easily expressed-if you cannot explain it in one sentence, you probably aren't completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn't trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals.
As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful. This book, and its companion CD-ROM, will provide that knowledge. The CD-ROM includes spreadsheets designed to help you forecast volatility and evaluate trades together with simulation engines.
About the Author
Euan Sinclair is an option trader with over ten years of experience trading options professionally. He specializes in the design and implementation of quantitative trading strategies. Sinclair is currently a proprietary option trader for Bluefin Trading, where he trades based on quantitative models of his own design. He holds a PhD in theoretical physics from the University of Bristol.
Table of Contents
Introduction.
The Trading Process.
Chapter 1. Option Pricing.
The Black Scholes Merton Model.
Summary.
Chapter 2. Volatility Measurement and Forecasting.
Defining and Measuring Volatility.
Definition of Volatility.
Alternative Volatility Estimators.
Close to Close Estimator.
Parkinson Estimator.
Garman Klass Estimator.
Rogers Satchell Estimator.
Yang Zhang Estimator.
Using Higher Frequency Data.
Forecasting Volatility.
Maximum Likelihood Estimation.
Forecasting the Volatility Distribution.
Summary.
Chapter 3. Implied Volatility Dynamics.
Volatility Level Dynamics.
Smile Dynamics.
Strengths.
Weaknesses.
Summary.
Chapter 4. Hedging.
Ad-Hoc Hedging Methods.
Hedging at Regular Intervals.
Hedging to a Delta Band.
Hedging Based On Underlying Price Changes.
Utility Based Methods.
The Asymptotic Solution of Whalley and Wilmott.
The Double Asymptotic Method of Zakamouline.
Estimation of Transaction Costs.
Strengths.
Weaknesses.
Aggregation of Options on Different Underlyings.
Summary.
Chapter 5. Hedged Option Positions.
Discrete Hedging and Path Dependency.
Volatility Dependency.
Summary.
Chapter 6. Money Management.
Ad-Hoc Schemes.
The Kelly Criterion.
Good Points.
Bad Points.
Alternatives to the Kelly Criterion.
Trade Sizing in a Continuously Changing Setting.
A Simple Approximation.
Summary.
Chapter 7. Trade Evaluation.
General Planning Procedures.
Risk Adjusted Performance Measures.
The Sharpe Ratio.
Alternatives to the Sharpe Ratio.
Setting Goals.
Persistence of Performance.
Relative Persistence.
Absolute Persistence.
Summary.
Chapter 8. Psychology.
Self Attribution Bias.
Overconfidence.
The Availability Heuristic.
Short Term Thinking.
Loss Aversion.
Conservatism and Representativeness.
Confirmation Bias.
Hindsight Bias.
Anchoring and Adjustment.
Summary.
Chapter 9. Lifecycle of a Trade.
Pre-Trade Analysis.
June 25th2007.
June 26th2007.
June 27th2007.
June 28th2007.
June 29th2007.
July 2nd2007.
July 3rd2007.
Post-Trade Analysis.
Chapter 10. Conclusion.
Execution Ability.
Concentration.
Product Selection.
Appendix A. Model Free Implied Variance and Volatility.
The VIX Index.
Appendix B. Spreadsheet Instructions.
Garch.
Volatility Cones and Skew and Kurtosis Cones.
Daily Option Hedging Simulation.
Trade Evaluation.
Trading Goals.
Corrado Su Skew Curve.
Mean Reversion Simulator.
Reader Resources.
Essential Books.
Thought Provoking Books.
Useful Websites.
References.
About the CD-ROM.
Index.