Overview

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 ...
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Volatility Trading

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Overview

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.
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Product Details

  • ISBN-13: 9781118045299
  • Publisher: Wiley
  • Publication date: 1/11/2011
  • Series: Wiley Trading , #331
  • Sold by: Barnes & Noble
  • Format: eBook
  • Edition number: 1
  • Pages: 224
  • File size: 2 MB

Meet 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.
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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.

Using Higher-Frequency Data.

Forecasting Volatility.

Forecasting the Volatility Distribution.

Summary.

Chapter 3. Implied Volatility Dynamics.

Volatility Level Dynamics.

Smile Dynamics.

Summary.

Chapter 4. Hedging.

Ad Hoc Hedging Methods.

Utility Based Methods.

Estimation of Transaction Costs.

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.

Alternatives to the Kelly Criterion.

Trade Sizing in a Continuously Changing Setting.

Summary.

Chapter 7. Trade Evaluation.

General Planning Procedures.

Risk-Adjusted Performance Measures.

Setting Goals.

Persistence of Performance.

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. Life Cycle of a Trade.

Pretrade Analysis.

Post-Trade Analysis.

Summary.

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.

Resources.

Essential Books.

Thought-Provoking Books.

Useful Web Sites.

References.

About the CD-ROM.

Index.

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