Volatility Trading, + CD-ROM (Wiley Trading) [Hardcover]

Euan Sinclair (Author)

Book Description

Publication Date: June 23, 2008 | Series: Wiley Trading (Book 331)

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.

Editorial Reviews

Book Description

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 will provide that knowledge. --This text refers to the Kindle Edition edition.

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.

See all Editorial Reviews

Product Details

• Hardcover: 224 pages
• Publisher: Wiley (June 23, 2008)
• Language: English
• ISBN-10: 0470181990
• ISBN-13: 978-0470181997
• Product Dimensions: 9 x 6.4 x 0.9 inches
• Shipping Weight: 15.5 ounces (View shipping rates and policies)
• Average Customer Review: 4.5 out of 5 stars  See all reviews (17 customer reviews)
• Amazon Best Sellers Rank: #394,356 in Books (See Top 100 in Books)

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Customer Reviews

Most Helpful Customer Reviews

50 of 53 people found the following review helpful:

3.0 out of 5 stars Hugely promising; far too many errors, December 19, 2009

By 

Steve (Chicago, IL United States) - See all my reviews

Amazon Verified Purchase

This review is from: Volatility Trading, + CD-ROM (Wiley Trading) (Hardcover)

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.

47 of 51 people found the following review helpful:

5.0 out of 5 stars It takes a lot of experience, time, and energy to know - and I mean really know - what Sinclair shares in this book, July 31, 2008

By 

Derek G. Nokes (Canada) - See all my reviews
(REAL NAME)   

This review is from: Volatility Trading, + CD-ROM (Wiley Trading) (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.

25 of 26 people found the following review helpful:

4.0 out of 5 stars "Potpourri", October 2, 2008

By 

G. Burnett (Australia) - See all my reviews
(REAL NAME)   

This review is from: Volatility Trading, + CD-ROM (Wiley Trading) (Hardcover)

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.