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.
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
Inhaltsverzeichnis
Introduction 1
The Trading Process 3
Chapter 1 Option Pricing 7
The Black-Scholes-Merton Model 7
Summary 14
Chapter 2 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
Chapter 3 Implied Volatility Dynamics 45
Volatility Level Dynamics 48
Informal Definition 50
More Formal Definition 50
A Traders' Definition 50
Smile Dynamics 54
Summary 62
Chapter 4 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
Chapter 5 Hedged Option Positions 87
Discrete Hedging and Path Dependency 87
Volatility Dependency 93
Summary 99
Chapter 6 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
Chapter 7 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
Chapter 8 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
Chapter 9 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
Chapter 10 Conclusion 175
Execution Ability 176
Concentration 177
Product Selection 177
Appendix A: Model-Free Implied Variance and Volatility 179
The VIX Index 180
Appendix B: 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
