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Volatility Trading, + CD-ROM Hardcover – June 23, 2008

4.5 out of 5 stars 19 customer reviews

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Editorial Reviews

From the Inside Flap

Successful trading, says Euan Sinclair, is about developing a consistent process. You must have a goal; you must find trades with a clear statistical edge; you must capture that edge and size each trade in a way that is consistent with your goal. Everything else you do must be done within this framework.

In Volatility Trading, Sinclair offers you a quantitative model for measuring volatility in or-der 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.

From the Back Cover


“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


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Product Details

  • Hardcover: 224 pages
  • Publisher: Wiley; 1 edition (June 23, 2008)
  • Language: English
  • ISBN-10: 0470181990
  • ISBN-13: 978-0470181997
  • Product Dimensions: 6.3 x 0.8 x 9.3 inches
  • Shipping Weight: 15.5 ounces (View shipping rates and policies)
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (19 customer reviews)
  • Amazon Best Sellers Rank: #110,022 in Books (See Top 100 in Books)

More About the Author

Euan Sinclair is an option trader with over eighteen years of professional trading experience. He currently works on strategy design and is the risk manager at Bluefin Trading. He holds a PhD in theoretical physics from the University of Bristol.

Originally from New Zealand, Euan currently lives in Chicago with his wife, Ann, his dog, Ralph, and a variable number of cats.

Customer Reviews

Top Customer Reviews

Format: Hardcover Verified Purchase
I was very excited about Sinclair's "Volatility Trading" about halfway into it and enthusiastically recommended it to many of my colleagues. There are several great points here, all of which are covered in a concise manner geared toward professionals (which is itself refreshing, and far too rare in the genre). Highlights include a nice overview of various volatility estimators (including some newer ones), a nifty intuitive derivation of BSM, a very interesting treatment of near-"optimal" hedging methods, a discussion of how to quantify market impact, and a useful chapter on the path-dependency of derivative payouts.

However, after finishing the book, I had to temper my early recommendation severely: there are far too many obvious errors, which makes me suspect there are probably also many other, less-obvious ones (and causes me to wonder whether all the five-star reviewers here actually read the entire book carefully). A few of the most egregious examples:

* The butterfly payout diagram on p. 77 is upside down!
* Implied and realized vol terms are reversed in formula 5.1.
* "w" in formula 6.2 should be "l".
* p. 105 asks us to "differentiate with respect to x", but there is no "x". "f" is intended.
* Formula 6.11 is rendered nonsense by the very strange term (I am assuming a bizarre typo): "ln[()] 1".
* Missing parens around a subtraction on p. 113, giving the wrong result.
* Typos in formula 7.7 render it useless ("GC" in the numerator means GG, and "GC" in the demoninator means GB).

I searched for an errata list online but to no avail. I think a revised edition is badly in order.
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Format: Hardcover
Over the course of my career I have come to own literally hundreds of books about derivatives pricing and trading. Few of these books manage to communicate the essence of what a professional derivatives trader needs to do to be successful. Volatility Trading is truly rare in that it presents a framework for analysis that is supported by a clear, well-defined trading philosophy: systematically find an edge and learn how to exploit it correctly. It takes a lot of experience, time, and energy to know - and I mean really know - what Sinclair shares in this book.

I found the chapter on volatility measurement and forecasting to be particularly useful. Few options traders take the time to understand the efficiency of their volatility estimators. Even fewer could clearly communicate that what we need is a view on the volatility distribution rather than a point forecast when we are trading volatility.

The author's mix of trading philosophy, quantitative intuition, and obvious trading experience is refreshing. The straight-forward no nonsense writing style also makes the book very readable. I would recommend this book to any quantitatively-minded trader. The chapter on money-management alone is easily worth the price of the book.
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Format: Hardcover Verified Purchase
In "Volatility Trading" Euan Sinclair presents a compilation of the most notable features of many, many theorists. A lot of the theories have no practical value but they do make colourful commentary that leads to a meaningful conclusion. In addition he includes a potpourri of formulae including the Corrado and Su formula for including kurtosis and skewness in the normal Black Scholes Merton model call value. The Corrado Su skew curve, skew and kurtosis cones and volatility cones are included in files on the CD-Rom which accompanies the book.
Please note that Sinclair states that most of the information in " Options, Futures and other Derivatives" by John C Hull is prerequisite to reading his book. Sinclairs book is not suitable for beginners.
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Format: Hardcover
The value of just about any trade book in any profession boils down to a few questions: Is the book clearly written? Is it reasonably current and comprehensive for its intended audience? Is it technically correct and accurate in the details? And is there coverage of material that isn't readily available elsewhere? Volatility Trading wins on all counts and really has no peer as far as I've seen (Taleb's Dynamic Hedging comes closest, maybe, except that is terribly written and edited).

There is plenty of rarely covered material in Volatility Trading. For instance, the author develops money managment principles and trade sizing techniques grounded in utility theory. This is almost unheard of in a book on option trading. Professional gamblers, of course, have known and used Kelly for many years, and so have futures traders -- but it seems to be far less known to the option trading world. Optimal hedging and volatility cones are a few of the other topics rarely covered in books of its kind.

There is a reasonably moderate level of mathematical sophistication expected of the reader, who should be comfortable with basic option pricing theory, elementary statistics and calculus. But never does the author tediously drag readers through technical details or difficult derivations -- this is extremely refreshing. It's a results-oriented book, as one would expect of a book aimed at practitioners. There are some spreadsheet demos on the accompanying CD.

The book also nicely covers some of the uses and abuses of statistics, often with strong analogies to baseball. The author assigns proper importance to sample size: for instance he argues that point estimates of volatility are virtually worthless without some measure of the associated error.
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