Volatility Trading, + Website

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  • Edition: 2nd
  • Format: Hardcover
  • Copyright: 4/1/2013
  • Publisher: Wiley
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Popular guide to options pricing and position sizing for quant traders In this second edition of this bestselling book, Sinclair offers a quantitative model for measuring volatility in order to gain an edge in 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. This new edition includes new chapters on the dynamics of realized and implied volatilities, trading the variance premium and using options to trade special situations in equity markets. Filled with volatility models including brand new option trades for quant traders Options trader Euan Sinclair specializes in the design and implementation of quantitative trading strategies Volatility Trading, Second Edition + Website outlines strategies for defining a true edge in the market using options to trade volatility profitably.

Author Biography

EUAN SINCLAIR is an option trader with fifteen years' experience. He specializes in the design and implementation of quantitative trading strategies. Sinclair is currently a proprietary option trader for Bluefin Trading, where he trades based on quantitative models of his own design. He holds a PhD in theoretical physics from the University of Bristol.

Table of Contents


Introduction to the Second Edition

About This Book

The Trading Process

Chapter 1 Option Pricing

The Black-Scholes Merton Model

Existence of a Tradable Underlying

Absence of Dividends or Storage Costs

Ability to Short the Underlying

The Existence of a Single Constant Interest Rate

Absence of Taxes

The Underlying can be Traded in any Size

It is Costless to Trade the Underlying

Volatility is Constant

Assumptions about the Distribution of Returns



Chapter 2 Volatility Measurement

Defining and Measuring Volatility

Definition of Volatility

Alternative Volatility Estimators

Using Higher-Frequency Data


Chapter 3 Stylized Facts about Returns and Volatility

Definition of a Stylized Fact

Volatility is Not Constant

Characteristics of the Return Distribution

Volume and Volatility

Distribution of Volatility


Chapter 4 Volatility Forecasting

Absence of Transaction Costs

Perfect Information Flow

Agreement About the Price Implications of Information

Maximum Likelihood Estimation

Volatility Forecasting Using Fundamental Information

The Variance Premium


Chapter 5 Implied Volatility Dynamics

Volatility Level Dynamics

The Smile and the Underlying

Smile Dynamics

Term Structure Dynamics


Chapter 6 Hedging

Ad Hoc Hedging Methods

Utility-Based Methods

Estimation of Transaction Costs

Aggregation of Options on Different Underlyings


Chapter 7 Distribution of Hedged Option Positions

Discrete Hedging and Path Dependency

Volatility Dependency


Chapter 8 Money Management

Ad Hoc Sizing Schemes

The Kelly Criterion


Chapter 9 Trade Evaluation

General Planning Procedures

Risk-Adjusted Performance Measures

Setting Goals

Persistence of Performance


Chapter 10 Psychology

Self-Attribution Bias


The Availability Heuristic

Short-Term Thinking

Loss Aversion

Conservatism and Representativeness

Confirmation Bias

Hindsight Bias

Anchoring and Adjustment

The Narrative fallacy

Prospect Theory


Chapter 11 Generating Returns through Volatility

The Variance Premium

Reasons for the Variance Premium


Chapter 12 The VIX

The VIX Index

VIX Futures

Volatility ETNs

Other VIX Trades


Chapter 13 Leveraged ETFs

Leveraged ETFs as a Trade Sizing Problem

A Long-Short Trading Strategy

Options on Leveraged ETFs


Chapter 14 Life Cycle of a Trade

Pretrade Analysis

Post-Trade Analysis


Chapter 15 Conclusion

Execution Ability


Product Selection


Appendix: Spreadsheet Instructions


Volatility Cones and Skew and Kurtosis Cones

Daily Option Hedging Simulation

Trade Evaluation

Trading Goals

Corrado-Su Skew Curve

Mean Reversion Simulator


Directly Applicable Books

Thought-Provoking Books

Useful Web Sites


About the Author

About the Companion Website


Rewards Program

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