Volatility Trading, + Website

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.

Acknowledgments

Introduction to the Second Edition

About This Book

The Trading Process

Chapter 1 Option Pricing

The Black-Scholes Merton Model

Existence of a Tradable Underlying

Absence of Dividends or Storage Costs

Ability to Short the Underlying

The Existence of a Single Constant Interest Rate

Absence of Taxes

The Underlying can be Traded in any Size

It is Costless to Trade the Underlying

Volatility is Constant

Assumptions about the Distribution of Returns

Conclusion

Summary

Chapter 2 Volatility Measurement

Defining and Measuring Volatility

Definition of Volatility

Alternative Volatility Estimators

Using Higher-Frequency Data

Summary

Chapter 3 Stylized Facts about Returns and Volatility

Definition of a Stylized Fact

Volatility is Not Constant

Characteristics of the Return Distribution

Volume and Volatility

Distribution of Volatility

Summary

Chapter 4 Volatility Forecasting

Absence of Transaction Costs

Perfect Information Flow

Agreement About the Price Implications of Information

Maximum Likelihood Estimation

Volatility Forecasting Using Fundamental Information

The Variance Premium

Summary

Chapter 5 Implied Volatility Dynamics

Volatility Level Dynamics

The Smile and the Underlying

Smile Dynamics

Term Structure Dynamics

Summary

Chapter 6 Hedging

Ad Hoc Hedging Methods

Utility-Based Methods

Estimation of Transaction Costs

Aggregation of Options on Different Underlyings

Summary

Chapter 7 Distribution of Hedged Option Positions

Discrete Hedging and Path Dependency

Volatility Dependency

Summary

Chapter 8 Money Management

Ad Hoc Sizing Schemes

The Kelly Criterion

Summary

Chapter 9 Trade Evaluation

General Planning Procedures

Risk-Adjusted Performance Measures

Setting Goals

Persistence of Performance

Summary

Chapter 10 Psychology

Self-Attribution Bias

Overconfidence

The Availability Heuristic

Short-Term Thinking

Loss Aversion

Conservatism and Representativeness

Confirmation Bias

Hindsight Bias

Anchoring and Adjustment

The Narrative fallacy

Prospect Theory

Summary

Chapter 11 Generating Returns through Volatility

The Variance Premium

Reasons for the Variance Premium

Summary

Chapter 12 The VIX

The VIX Index

VIX Futures

Volatility ETNs

Other VIX Trades

Summary

Chapter 13 Leveraged ETFs

Leveraged ETFs as a Trade Sizing Problem

A Long-Short Trading Strategy

Options on Leveraged ETFs

Summary

Chapter 14 Life Cycle of a Trade

Pretrade Analysis

Post-Trade Analysis

Summary

Chapter 15 Conclusion

Execution Ability

Concentration

Product Selection

Summary

Appendix: 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

Directly Applicable Books

Thought-Provoking Books

Useful Web Sites

References

About the Author

About the Companion Website

Index

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