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; HAR/CDR edition (June 23, 2008)
• Language: English
• ISBN-10: 0470181990
• ISBN-13: 978-0470181997
• Product Dimensions: 6.5 x 0.9 x 9.4 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: #257,084 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.

Most Helpful Customer Reviews

61 of 64 people found the following review helpful

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

By Steve

Format:Hardcover|Amazon 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.

49 of 53 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

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.

27 of 28 people found the following review helpful

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

By G. Burnett

Format:Hardcover|Amazon 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.

26 of 31 people found the following review helpful

5.0 out of 5 stars Extremely useful July 21, 2008

By Chris

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.... There also are a few counterintutive results. For example, the author successfully articulates why the well-known Rule of 16 really ought to be the Rule of 20, reasoning that most traders tend to think in terms expected absolute return -- "typical" price moves -- rather than root-mean-squared returns.

All in all this is a valuable resource; it is an extremely well-written compendium of useful results on volatility estimation/forecasting and trading principles. It is a book written by a quantitative trader for quantitative traders, but quantfin researchers should find the book useful too, given plenty of references to the literature. Read more ›