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- Product code: 262838
- ISBN: 0470181990,
ISBN13: 9780470181997,
212 pages, CD-Rom + hb
Published by John Wiley & Sons Inc on 2008
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Description of Volatility Trading |
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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Contents of Volatility Trading |
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
Close to Close Estimator
Parkinson Estimator
Garman Klass Estimator
Rogers Satchell Estimator
Yang Zhang Estimator
Using Higher Frequency Data
Forecasting Volatility
Maximum Likelihood Estimation
Forecasting the Volatility Distribution
Summary
Chapter 3. Implied Volatility Dynamics
Volatility Level Dynamics
Smile Dynamics
Strengths
Weaknesses
Summary
Chapter 4. Hedging
Ad-Hoc Hedging Methods
Hedging at Regular Intervals
Hedging to a Delta Band
Hedging Based On Underlying Price Changes
Utility Based Methods
The Asymptotic Solution of Whalley and Wilmott
The Double Asymptotic Method of Zakamouline
Estimation of Transaction Costs
Strengths
Weaknesses
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
Good Points
Bad Points
Alternatives to the Kelly Criterion
Trade Sizing in a Continuously Changing Setting
A Simple Approximation
Summary
Chapter 7. Trade Evaluation
General Planning Procedures
Risk Adjusted Performance Measures
The Sharpe Ratio
Alternatives to the Sharpe Ratio
Setting Goals
Persistence of Performance
Relative Persistence
Absolute Persistence
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. Lifecycle of a Trade
Pre-Trade Analysis
June 25th 2007
June 26th 2007
June 27th 2007
June 28th 2007
June 29th 2007
July 2nd 2007
July 3rd 2007
Post-Trade Analysis
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
Reader Resources
Essential Books
Thought Provoking Books
Useful Websites
References
About the CD-ROM
Index
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About Euan Sinclair |
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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