Volatility Trading / Edition 1

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Overview

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!
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Product Details

  • ISBN-13: 9780470181997
  • Publisher: Wiley
  • Publication date: 6/20/2008
  • Series: Wiley Trading Series , #331
  • Edition description: BK W/CD-ROM
  • Edition number: 1
  • Pages: 224
  • Sales rank: 1,026,947
  • Product dimensions: 6.10 (w) x 9.10 (h) x 1.10 (d)

Meet the Author

EUAN SINCLAIR is an option trader with fifteen years' experience. 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.

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Table of Contents


Introduction     1
The Trading Process     3
Option Pricing     7
The Black-Scholes-Merton Model     7
Summary     14
Volatility Measurement and Forecasting     15
Defining and Measuring Volatility     15
Definition of Volatility     16
Alternative Volatility Estimators     22
Close-to-Close Estimator     26
Parkinson Estimator     26
Garman-Klass Estimator     27
Rogers-Satchell Estimator     27
Yang-Zhang Estimator     27
Using Higher-Frequency Data     27
Forecasting Volatility     31
Maximum Likelihood Estimation     36
Forecasting the Volatility Distribution     39
Summary     43
Implied Volatility Dynamics     45
Volatility Level Dynamics     48
Informal Definition     50
More Formal Definition     50
A Traders' Definition     50
Smile Dynamics     54
Summary     62
Hedging     63
Ad Hoc Hedging Methods     65
Hedging at Regular Intervals     65
Hedging to a Delta Band     65
Hedging Based on Underlying Price Changes     65
Utility-Based Methods     66
The Asymptotic Solution of Whalley and Wilmott     71
The Double Asymptotic Method of Zakamouline     74
Estimation of Transaction Costs     78
Aggregation of Options on Different Underlyings     83
Summary     85
Hedged Option Positions     87
Discrete Hedging and Path Dependency     87
Volatility Dependency     93
Summary     99
Money Management     101
Ad Hoc Schemes     101
The Kelly Criterion     103
Alternatives to the Kelly Criterion     113
Trade Sizing in a Continuously Changing Setting     118
A Simple Approximation     124
Summary     126
Trade Evaluation     127
General Planning Procedures     128
Risk-Adjusted Performance Measures     134
The Sharpe Ratio     135
Alternatives to the Sharpe Ratio     137
Setting Goals     140
Persistence of Performance     142
Relative Persistence     143
Absolute Persistence     144
Summary      147
Psychology     149
Self-Attribution Bias     151
Overconfidence     152
The Availability Heuristic     155
Short-Term Thinking     156
Loss Aversion     157
Conservatism and Representativeness     158
Confirmation Bias     160
Hindsight Bias     161
Anchoring and Adjustment     162
Summary     162
Life Cycle of a Trade     165
Pretrade Analysis     165
June 25, 2007     165
June 26, 2007     169
June 27, 2007     169
June 28, 2007     170
June 29, 2007     170
July 2, 2007     170
July 3, 2007     170
Post-Trade Analysis     171
Summary     173
Conclusion     175
Execution Ability     176
Concentration     177
Product Selection     177
Model-Free Implied Variance and Volatility     179
The VIX Index     180
Spreadsheet Instructions     183
GARCH     183
Volatility Cones and Skew and Kurtosis Cones     184
Daily Option Hedging Simulation     184
Trade Evaluation     185
Trading Goals     185
Corrado-Su Skew Curve     185
Mean Reversion Simulator     186
Resources     187
Essential Books     187
Thought-Provoking Books     189
Useful Web Sites     190
References     193
About the CD-ROM     201
Index     203
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