Customer Reviews

Volatility Trading, + CD-ROM (Wiley Trading)

5 star:		(12)
4 star:		(2)
3 star:		(3)
2 star:		(0)
1 star:		(0)

 

 

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.

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.

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.

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.

I have endorsed this book on the dust jacket already, so it is a bit of a wheeze to restate that this is an excellent, clear, and helpful book for those who (inescapably) take a position in volatility. This work is aimed for practitioners, and for those who are curious or students of the subject. But volatility market makers are the audience that should most welcome this work. Hull, Haug, Gatheral, Baird, and now Sinclair's Volatility Trading make up the short shelf of the best works in the field.

Sinclair's book bridges the gap between highly technical, formula-driven option pricing textbooks and collections of anecdotes meant to give insight into the behavioral aspect of trading. He gives practical guidance to traders new and experienced with brevity, clarity, and humor. Volatility Trading is an important and useful addition to any trader's library.

This is certainly one of the best books I read about Volatility. It is very practical and reveals a lot of details of the anatomy of trades, which were never covered in such details, in other books. I would like,however, to see the author make all his, software used, available to the public, in a software package that can be bought or licensed. Excellent book.
Tom Elias.

Volatility Trading is most certainly the clearest and most accessible books that I've read on option trading. The author clearly has trading experience; it shows not only in his unusually clear writing style but also in pragmatic insights that only come from experience in ones field. The book has a very handy CD with example spreadsheets.


Anybody who wants to become an option trader must get this book and read it several times, this is the cheapest lesson you'll ever get on options.

I'd also recommend that all people who write technical books on the subject of mathematical or statistical finance; read this book and learn from the author's style, you really need to emulate this author to be useful to your audience and potentially sell more books.

Lastly I hope this author continues to write on the subject.

I thoroughly enjoyed the writer's style. He obviously knows what he is talking about. He is very generous with information and offers some very helpful excel spreadsheets to complement the book. This allows the reader to gain a more practical understanding of the concepts presented.

In my opinion the author presents the complex concepts of volatility trading in the most digestible form possible, but with that said, be prepared to use some math and do some thinking. Some things can only be broken down so far.

The author is a professional trader and it shows.

If you want to do some work and learn how this game works, then take the time to read and understand this book....On the other hand, if you want to be a dilettante, crying and blaming the author because you don't understand the math, seek life elsewhere.


Highly recommended.

P.S. I recently took down this review in order to read the book again and see if I still felt the same way about it. I couldn't think of anything I wanted to change, except to take another chance to emphasize how informative and helpful this book is.

This is one of the best books I have seen on trading. Each and every page in this book has extremely useful information relevant for practical option trading. Author is clearly a successful trader himself is not afraid of giving insights he has got into the underlying behavior and corresponding option dynamics. It is however not an introductory book and probably needs to be read multiple times before one can assimilate the material enough to implement it in software to use it in practice.

I hope the author undertakes an effort to write a more comprehensive book on option trading which is not limited to volatility trading.