Positional Option Trading: An Advanced Guide (Wiley Trading) 1st Edition
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A detailed, one-stop guide for experienced options traders
Positional Option Trading is a rigorous, professional-level guide on sophisticated techniques from professional trader and quantitative analyst Euan Sinclair. The author has over two decades of high-level option trading experience. He has written this book specifically for professional options traders who have outgrown more basic trading techniques and are searching for in-depth information suitable for advanced trading.
Custom-tailored to respond to the volatile option trading environment, this expert guide stresses the importance of finding a valid edge in situations where risk is usually overwhelmed by uncertainty and unknowability. Using examples of edges such as the volatility premium, term-structure premia and earnings effects, the author shows how to find valid trading ideas and details the decision process for choosing an option structure that best exploits the advantage.
Advanced topics include a quantitative approach for directionally trading options, the robustness of the Black Scholes Merton model, trade sizing for option portfolios, robust risk management and more. This book:
- Provides advanced trading techniques for experienced professional traders
- Addresses the need for in-depth, quantitative information that more general, intro-level options trading books do not provide
- Helps readers to master their craft and improve their performance
- Includes advanced risk management methods in option trading
No matter the market conditions, Positional Option Trading is an important resource for any professional or advanced options trader.
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From the Inside Flap
Created for experienced traders who desire the significant benefits of including options in their trading strategies and portfolios, Positional Option Trading: An Advanced Guide shows readers how to find a trading situation with an edge, structure a trade, and control the risk.
Written in three parts, the first section of Positional Option Trading discusses the efficient market hypothesis and how, even if we accept it as true, it leaves plenty of room for the discovery of profitable trading strategies. These opportunities can be categorized as inefficiencies or risk premia, each of which should be traded differently. The author also discusses behavioral psychology and its ability to inform our strategies. Technical and fundamental analysis are explored as ways of finding trading edges.
Forecasting, as well as the overpricing of implied volatility are examined in the next chapters, while the section closes with a description of eleven specific phenomena that can be profitably traded.
The second part of the book discusses the distributional properties of some option structures used to monetize the trading edges revealed by the previously discussed techniques. Volatility trading structures and directional option trades are examined next.
Finally, the third part of Positional Option Trading discusses the concept of risk generally. The book closes with a description of specific topics like trade sizing and the idea of unknowable risks, using historical examples as a guide.
Perfect for moderately to highly experienced traders who hope to use option trading to reduce risk and increase returns in their trading strategies, Positional Option Trading belongs on the bookshelves of professional traders and money managers as well as those who wish to maximize the efficiency of their own portfolios.
From the Back Cover
Praise for POSITIONAL OPTION TRADING
???Euan Sinclair???s book provides an investor with a systematic quantitative approach for using options to enhance returns. Sinclair has worked for over 25 years in the options industry with two of the most successful market making firms. Drawing from his vast experience he exposes tricks of the trade that were previously only available to professionals or exchange members.???
???Blair Hull, Founder and Chairman, Hull Tactical Asset Allocation
???This book is another excellent example of Sinclair???s in-depth understanding of derivatives markets. Chapter 10 alone is worth the price of the book; it deftly explains the real-world pitfalls that one usually learns about only after suffering losses. With astute analysis, Sinclair guides his readers through the complex world of derivatives markets.???
???Arthur Duquette, Partner, Bluefin Trading
???Volatility trading is asymmetrically difficult either on the short side or on the long side. In recent years we have seen both long and short volatility shops going out of business ... Euan Sinclair manages to relay a strong message that the difference lies in finding trades with positive expected value, not with the sign of your trades. He proposes to analyze the term structure, fundamental factors, and earnings for edges. He suggests evaluating the skewness and trade sizing to monetize the edges. This book is a must-read full of knowledge for anyone working with and learning about options markets!???
???Artur Sepp, Director of Research, Quantica Capital AG
- Publisher : Wiley; 1st edition (September 1, 2020)
- Language : English
- Hardcover : 240 pages
- ISBN-10 : 1119583519
- ISBN-13 : 978-1119583516
- Item Weight : 1.09 pounds
- Dimensions : 6.3 x 1 x 9.1 inches
- Best Sellers Rank: #68,559 in Books (See Top 100 in Books)
- Customer Reviews:
About the author
Top reviews from the United States
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This book is a practical book by an experienced trader who writes clearly about what works, and why it works.
The first edition of Euan Sinclair's Volatility Trading was a revelation for me as a trader. It's a book written for the professional options trader. I was spreading futures when I read it - and had barely traded an option. But it was an absolute revelation to me. Why? Because it did something much more valuable than teach me about volatility: it taught me how to *think* about trading.
Euan's trading process and mental model of the market comes through strongly in this book. Reading this book will change the way you think about the markets and how to trade in a realistic, high probability way.
Positional Option Trading will be useful to all traders: not just options traders, and certaintly not just professionals.
This book picks up where Option Trading (by the same author) left off. It assumes quite a lot of knowledge - so you should pick up Option Trading along with this if you haven't already.
It starts with the basics of getting an edge and finishes with risk management. The material is advanced, but always practical. You will be well rewarded by repeated readings of this material - especially on sizing.
The material is intellectually honest. The author makes no attempt to draw firm conclusions when the data does not warrant it. Everything in trading is a trade-off made under immense uncertainty and the author makes no claim to the contrary. Valuable pointers are provided for the dedicated trader.
A criticism of some serious trading books is that they don't tell you exactly to trade. This book doesn't either- but in Chapter 5 you are given a comprehensive list of quality edges backed by market intuition and empirical evidence. This is a valuable insight into what serious positional trading really looks like. Many retail traders will likely be surprised by the simplicity of these edges. (The author is careful to assert that these are edges and not rules.)
With a little work, you can include this stuff in your trading right away. It includes:
- The implied volatility forward curve as a predictor of variance premium returns
- Using fundamental factors (think Fama/French stuff) to predict cross-sectional equity option returns
- Trading the post-earnings announcement drift (PEAD) with vertical spreads
- Trading volatility over earnings announcements
- The tendency of the volatility risk premium to be concentrated overnight
- Trading pre-FOMC SPX trend effects, and selling volatility over the announcement
- The tendency for "time" to be mispriced on non-trading days (despite this sounding dumb)
- Timing the volatility risk premium at VVIX extremes
- Trading reversal effects on stocks that move big ahead of earnings
- Trading the pre-announcement drift in late reporting stocks.
At times the book is hilarious. It's a very easy read, despite the advanced subject matter.
Chapter 1 covers the basics of options pricing models. You probably won't understand this if you don't already understand it. So buy Euan's Option Trading too.
Chapter 2 covers the Efficient Market Hypothesis in a practical and entertaining way. "The traders' concept of the efficient market hypothesis (EMH) is 'making money is hard'. This isn't wrong, but it is worth looking at the theory in more detail." This chapter makes a helpful distinction between inefficiencies and mispriced risk premia.
Chapters 3 and 4 look at volatility forecasting and the volatility risk premium. These are very good treatments if you are already familiar with the subject matter.
Chapter 5 gives you 10 edges to trade. I would have killed for this chapter when I was starting out.
Chapter 6 shows the P&L distribution of volatility positions. It's a very useful reference.
Chapter 7 extends the BSM framework to incorporate directional views. This is eye-opening and gives the reader a simple framework for strike and strategy selection. The author is careful to point out that the utility of this is dependent on your ability to predict returns (which probably isn't very good.)
Chapter 8 shows the P&L distribution of directional options structures.
Chapter 9 discusses trade sizing and the Kelly criterion. It incorporates estimation uncertainty, skew of returns and stop losses in the treatment. As far as I am aware it is unique in doing so (especially the treatment of stop losses.) This is a challenging chapter - but will be extremely rewarding if you go through it carefully.
Finally, Chapter 10 covers non-obvious risks to the trader.
If you are serious about option trading, get this book and Option Trading by the same author.
If you're a trader with no intention of trading options you'll still get an enormous amount out of the book. It will teach you how to think about high probability trading.
Chapter 5 gives a whirlwind tour of potential +EV ideas, with good literature review and references. I like the confidence level layout for the strength of the factors explored. Chapter 6 is just a walkthrough of the different ways to get vega exposure. This book assumes an advanced reader, so it does not over so much how a position is constructed but does monte carlo simulations in a GBM world + assumptions which is great. it can be a good reference instead of having to code the simulations yourself.
Chapter 7 and 8 on directional options trading + strategy selection. Is really what i was looking forward to due to the title Positional Option Trading. Although the framework of simulation and building a new pricing distribution based on your assumption is good (kind of an option version of black litterman). The Strike Choice and Expiration Choice sections left a lot to be desired, as it boils down to 'there is no best strategy' or 'there is no simple answer'. I think it would have been useful to have a better logical framework to determine your utility function or walk through an example of someone maximizing one of the given and for what reason. I feel these parts just leave you hanging, which is why it gets 4/5.
This is for sure on of the better options books out there, I have read all of Euan's books and it keeps the balance between conversational writing style and technical knowledge. I think the layout of strategies and simulations are great. However the framework for decisions in directional trading left something to be desired (presuming you already have your forecast model), as in how to better structure your expression of a trade.
I appreciate his honesty early on in the preface, "Trading is fundamentally an exercise in managing ignorance." This line set the tone as I continued reading. Will this book or any options trading book parlay my efforts into riches? Doubtful. But there's a sincerity to what Mr Sinclair attempts to do in this book that I found refreshing.
He's not pretending anything, and there are no grand proclamations or secret formulas that will make anyone's trading strategies work flawlessly. What a person will come away with is an appreciation for the rigour necessary to be better at thinking clearly through option strategies before applying them in a trade. And for that, I'm grateful.