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Popular guide to options pricing and position sizing for quant traders
In this second edition of this bestselling book, Sinclair offers a quantitative model for measuring volatility in order to gain an edge in 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. This new edition includes new chapters on the dynamics of realized and implied volatilities, trading the variance premium and using options to trade special situations in equity markets.
- Filled with volatility models including brand new option trades for quant traders
- Options trader Euan Sinclair specializes in the design and implementation of quantitative trading strategies
Volatility Trading, Second Edition + Website outlines strategies for defining a true edge in the market using options to trade volatility profitably.
- Sales Rank: #208704 in Books
- Brand: Sinclair, Euan
- Published on: 2013-04-01
- Original language: English
- Number of items: 1
- Dimensions: 9.30" h x 1.00" w x 6.25" l, 1.75 pounds
- Binding: Hardcover
- 320 pages
From the Inside Flap
Volatility, by definition, is indicative of underlying randomness. But there are patterns within the noise that can be measured and exploited. No one knows this better than author Euan Sinclair, a highly successful options trader with a doctorate in quantum chaos.
But the Second Edition of Volality Trading isn't just about the numbers. Drawing upon his fifteen years as a professional trader, Sinclair provides a fully fleshed-out approach to trading that relies as much on the all-important "human element" and the psychological and emotional biases that drive trading decisions, as it does on quantitative analysis.
Ultimately, says Sinclair, trading is about having a coherent trading philosophy and developing a rigorous system. It's about setting a goal that can be clearly expressed in one sentence, and about finding trades with a clear statistical edge. And, finally, it's about capturing that edge and sizing each trade in a way that is consistent with your goal. Everything you do as a trader must be done within this framework.
Taking an accessible, straightforward approach, Sinclair provides you with the knowledge and tools you need to create just such a framework. He walks you through the basics of option pricing, volatility measurement, hedging, money management, and performance evaluation. And he develops a Black-Scholes-Merton-based quantitative model for measuring volatility that can easily can be adapted to trading virtually any type of financial instrument.
Responding to major changes in the markets since the first edition, Sinclair has expanded his scope in this Second Edition to include coverage of the many new opportunities available in VIX futures, ETNs, and leveraged ETFs. He also:
- Analyzes the benefits and shortcomings of an array of historical volatility measurements
- Clearly shows how volatility behaves in the real world and how it relates to returns on underlying assets
- Outlines methods for forecasting volatility over the lifetime of a trade
- Supplies proven techniques for knowing when to hedge and by how much
- Delivers strategies for aggregating positions so as to reduce the need to hedge
- Shares priceless tips on how to boost returns through trade sizing—including techniques borrowed from the worlds of futures trading and professional gambling
- Arms you with powerful tools for evaluating the ongoing performance of your trading activity
- Fills you in on the latest research on cognitive and emotional biases that influence trading decisions and how to leverage them to your advantage
- Delineates time-tested strategies for trading VIX futures, ETNs, and leveraged ETFs
- Provides access to a companion website containing valuable spreadsheets, models for calculating volatility cones for different time periods, and simulation engines
Bringing volatility trading down to earth for even the most numbers-shy traders, as well as hard-nosed quants interested in acquiring a deeper understanding of options trading, Volatility Trading, Second Edition is an indispensable "tool of the trade."
From the Back Cover
Praise from experts for the Second Edition of Volatility Trading
"Benefitting from his experience as an option trader and his background as a physicist, Euan Sinclair gives a comprehensive and detailed treatment of theoretical and practical aspects involved in volatility trading. The style is to-the-point, focused, and honest. The book includes something rarer than a CD-ROM: humor. Heartily recommended for the practitioner, as well as the academic who wants to know."
—JESPER ANDREASEN, Danske Markets, Copenhagen
"Over the last five years, this has become the classic work on practical options trading. It has been updated to cover innovations in markets as well as additional material on behavioral finance and capturing risk premium Everyone who trades options should read this book."
—AARON BROWN, Risk Manager, AQR Capital Management, and author of Red-Blooded Risk
"Practical, engaging, and concise, Euan Sinclair's Volatility Trading remains the best book I have seen about options trading from the practitioner's standpoint. A far cry from the standard textbook treatment, Sinclair's discussion of practical topics such as trade sizing, exit criteria, and P&L management—peppered with relevant trading anecdotes—educates while countering many of the trader myths and fallacies one hears over the years. New material on trading the VIX and volatility ETFs is particularly timely and useful."
—STEVE CRUTCHFIELD, Head of U.S. Options, NYSE Euronext
About 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.
Most helpful customer reviews
37 of 38 people found the following review helpful.
The single best investment in increasing your probability for success in option trading is Euan Sinclair's Volatility Trading
By Bachelier
Textbooks on Volatility and the Greeks are often technically correct, but the distance from the flesh, blood, screens, and money of real markets make their arm's length detachment suspect and unpersuasive. They help you understand, but never answer the question: "okay, how do I *do*?"
Mathematical treatments are often more technically rigorous, but take their approach from the demand of proofs common for peer-reviewed perfection. They are, after all, math books.
And then there are Euan Sinclair's books, of which this welcome second edition of Volatility Trading with companion support website speaks of its utility and modernity just in the title alone. Sinclair provides knowledge and tools to create a framework for success: "here is what you need, here is how to do." Euan's prose is accessible, readable, understandable, and lean, but with an expectation that you have the appropriate math background to understand and use what he is explaining. He doesn't use math to obfuscate and show off how smart he is, he uses it as a tool, but it is a tool you need too, and he uses just enough.
As in the previous edition, Sinclair's Volatility Trading Second Edition with Website covers the basics of option pricing, volatility measurement, hedging, money management, and performance evaluation. He demonstrates a robust Black-Scholes-Merton-based quantitative model for measuring volatility that can easily be widely adapted to trading vol for lots of underlyings (not just stocks). These are the same strengths of the first edition, but now includes (in the entirely new Chapter 12) coverage and points to other opportunities in VIX futures, ETNs, and leveraged ETFs. Of course you could have adapted his methods and framework from the first edition of Volatility Trading to these instruments, but their trading volume growth has prompted Sinclair to make the connection more explicit.
Sinclair then continues and expands on the key essential theme of his previous edition: measure volatility for an edge. What differentiates this treatment from a textbook that may cover (poorly) the same areas is Sinclair never loses sight of the fact that 1) this is work, and 2) this is a business. His chapter and continuing reference to the *m*o*n*e*y* * m*a*n*a*g*e*m*e*n*t* of an options book is unique, refreshing, and crucial for success. This is not a textbook waving its hands over these issues with correct formulas and a few exercises: this is a practitioner directly and poignantly telling you that without proper technical money management no edge in the world can overcome your sloppy cash drawer.
Other strengths are that Euan efficiently analyzes the strengths and weaknesses of historical volatility measurements, gives solid methods for forecasting volatility over trade lifecycle, gives solid (money management!) techniques for deducing when to hedge and by how much, shows clever ways to aggregate positions across vol and other Greeks so that you don't have to hedge as much or have an internal natural hedge (this is actually the market-maker's whole game, isn't it?), and then shares some tales from the trader's trench on how to increase profits by trade sizing--techniques borrowed from futures trading, professional gambling and modified workable Kelly criterion, etc.
New or beefier chapters are offered on the dynamics of realized (what actual vol pattern happened versus what was priced at differing points) and implied volatilities, trading variance premiums and using options to trade special situations on equity market when you have a view.
Euan is also very good at pointing out --particularly in the case of realized volatilities over implied or straight vanilla-Black-Scholes-Merton vol-- that you are still trading against markets that are aggregations of people that have emotional, psychological, and heuristic biases in their behavior. This isn't a full-blown treatment of Behavioral Finance in Options Markets, but Sinclair offers up solid summaries and applications of these biases that the empirics and markets repeatedly say: we skew off log-normal into crazy clown time, and no explanations can capture that. So Euan points to how you spot these and construct an edge.
But Sinclair also correctly emphasizes the wisdom of the long-term robustness of the well established tools and models we do have (expect log-normal), and then demonstrates that trading is about having a more probable success by having a coherent trading philosophy, developing a rigorous system, and being methodical about finding and exploiting (often fleeting) edges.
In that approach alone this treatment beats any textbook or mathematical explication. Volatility Trading second edition couples the formulas and measurement and techniques with an admonition and clarity on management: set a goal and find trades with a clear statistical edge. Then he emphasizes the work: you have to capturing that edge and size each trade (money management!!!) correctly in a way that is consistent with your goal. This is the success framework of trading Volatility (or really, any of the Greeks).
The companion website is a boon: you'll have access to the great premiums already loaded that Sinclair will refresh from time to time as conditions and insights change. It includes valuable well-formatted and de-bugged spreadsheets, models for calculating volatility cones for different time periods, and neat little simulation engines that save you a lot of time from coding it up yourself in Mathematica or Matlab.
Full disclosure: Euan Sinclair is a valued friend who has generously offered his genius and insights both technical and practical to me gratis for decades. Euan is a mensch. If you suspect this review because of that friendship, then sadly that will be your loss: this is an excellent, valuable book that is worth multiples of the cover price. I purchased the book and did not receive a desk copy from the publisher.
Anyone who trades options should own both of Euan Sinclair's books, and Baird. You are welcome to add others to your bookshelf after these (well, never Natenberg), but these are essential for anyone who is serious. The single best investment in increasing your probability for success in option trading is Euan Sinclair's Volatility Trading, + Website. Get it today.
19 of 19 people found the following review helpful.
The best options/volatility book in my library
By Dr. Chrilly Donninger
Most finance books are either full of measure theory or the author avoids any mathematics at all.
This book belongs to the rare species which follows - in my view - a reasonable middle ground.
The author filters from the finance-paper glut the practical relevant topics and presents them in a comprehensible way. E.g. there are hundreds of papers about measuring volatility with high-frequency data. The mathematical properties of these methods are very nice. I have played around with these methods. The practical benefit was humble. In real life there exists microstructure, overnight jumps and a strong seasonal daily pattern. The author states about these models: "So as a long-term forecasting tool, using high-frequency data is possibly the wrong approach". This is in line with my own experience.
The author clearly states: There is no silver bullet. All methods and models have pros and cons. He lists explicitely the good and bad points of each major method.
Options (and OTC variance swaps) are the traditional way to trade volatility. With the introduction of VIX-Futures and VIX-based ETNs a new and very interesting volatility playing ground has been created. The 12th chapter deals with VIX-Trading. I liked especially the subchapter about VIX based ETNs. The author covers a very interesting model of Ch. Donninger :-) Generally this part of the book can be expanded in future editions.
The book can not be recommended for absolute beginners and mathematics-grumps. But it is by far the best book I know off for experienced traders and quants. It has a clear leitmotif and is well written.
A good companion to chapter 12 is probably my own homepage godotfinance.com.
16 of 17 people found the following review helpful.
Art Duquette
By Art
Volatility Trading is a practical guide to options trading that is both informative to newcomers to the asset class as well as a valuable reference to the experienced options trader. The mathematics are laid out so that they can be easily followed. The text is readable, clear and offers real world insights into its application and related pitfalls to be mindful of. I highly recommend it to all traders.
Chapter 10 is a standout to me which is expanded from the first edition. It is about trading psychology and this chapter alone is worth the price of the book. Sinclair acknowledges his lack of academic credentials in the field but his experience allows him to present insights that are far more useful than what can be drawn from academic studies. I have read a number of books on the topic and frankly wasted a lot of time in doing so. This is the most practical and concise piece that I have come across on the topic. His plainly stated assertion that confidence comes from competence and competence comes from knowing exactly what your edge is and most everything else is misguided is as accurate as anything I have seen on the topic. Even for the more experienced traders the section on self-attribution bias is a helpful reminder that you are not as good as your results in busy, volatile market and usually not as bad as your results in slow, tight markets, is a helpful reminder when trying to assess your own performance on any time scale. There is a good summary of much of the literature on the most common mistakes made in the evaluation process as well. The points he makes about the importance of finding a partner and what to look for should be strongly considered by every new trader. These relationships have a greater impact on careers than is commonly acknowledged.
This book is worth the time to go through and a valuable guide to have on your bookshelf.
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