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Nobody is more familiar with this situation than professional trader and quantitative analyst Euan Sinclair. In Option Trading, he's broken down the process into the parts you need to thrive—an understanding of market structure, ...
Nobody is more familiar with this situation than professional trader and quantitative analyst Euan Sinclair. In Option Trading, he's broken down the process into the parts you need to thrive—an understanding of market structure, knowledge of the instruments you trade, a way to capture an edge, and a methodology for managing risk.
Written with the serious trader in mind, this comprehensive guide opens by exploring options, both historically and conceptually, and then uses the no-arbitrage principle to introduce option pricing—examining both static arbitrage relationships and the dynamic hedging approach. With this critical background in hand, the largest and most substantial part of the book addresses how to actually trade options.
Along the way, you'll gain an in-depth understanding of:
Option trading is an important part of the financial landscape. This book will show you how to make the most of these profitable products, no matter what the market does.
The Role of Mathematics.
The Structure of this Book.
Chapter 1 History.
Chapter 2 Introduction to Options.
Specifications for an Option Contract.
Uses of Options.
Chapter 3 Arbitrage Bounds for Option Prices.
American Options Compared to European Options.
Absolute Maximum and Minimum Values.
Chapter 4 Pricing Models.
General Modeling Principles.
Choice of Dependent Variables.
The Binomial Model.
The Black-Scholes-Merton (BSM) Model.
Chapter 5 The Solution of the Black-Scholes-Merton (BSM) Equation.
Chapter 6 Option Strategies.
Forecasting and Strategy Selection.
Chapter 7 Volatility Estimation.
Defining and Measuring Volatility.
Volatility in Context.
Chapter 8 Implied Volatility.
The Implied Volatility Curve.
Parameterizing and Measuring the Implied Volatility Curve.
The Implied Volatility Curve as a Function of Expiration.
Implied Volatility Dynamics.
Chapter 9 General Principles of Trading and Hedging.
Trade Sizing and Leverage.
Scalability and Breadth.
Chapter 10 Market Making Techniques.
Trading Based on Order-Book Information.
Chapter 11 Volatility Trading.
Hedging in Practice.
The P/L Distribution of Hedged Option Positions.
Chapter 12 Expiration Trading.
Exercising the Wrong Options.
Irrelevance of the Greeks.
Expiring at a Short Strike.
Chapter 13 Risk Management.
Example of Position Repair.
Stock Risk: Dividends and Buy-in Risk.
The Early Exercise of Options.
Appendix A Distributions.
Moments and the “Shape” of Distributions.
Appendix B Correlation.