Option Trading : Pricing and Volatility Strategies and Techniques

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  • Format: Hardcover
  • Copyright: 2010-06-21
  • Publisher: Wiley
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An A to Z options trading guide for the new millennium and the new economyWritten by professional trader and quantitative analyst Euan Sinclair, Option Trading is a comprehensive guide to this discipline covering everything from historical background, contract types, and market structure to volatility measurement, forecasting, and hedging techniques.This comprehensive guide presents the detail and practical information that professional option traders need, whether they're using options to hedge, manage money, arbitrage, or engage in structured finance deals. It contains information essential to anyone in this field, including option pricing and price forecasting, the Greeks, implied volatility, volatility measurement and forecasting, and specific option strategies. Explains how to break down a typical position, and repair positions Other titles by Sinclair: Volatility Trading Addresses the various concerns of the professional options traderOption trading will continue to be an important part of the financial landscape. This book will show you how to make the most of these profitable products, no matter what the market does.

Author Biography

Euan Sinclair is an option trader with fifteen years of professional trading 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. Sinclair is also the author of the Wiley title Volatility Trading.

Table of Contents

Prefacep. xi
Professional Tradingp. xii
The Role of Mathematicsp. xiv
The Structure of this Bookp. xvi
Acknowledgmentsp. xix
Historyp. 1
Summaryp. 6
Introduction to Optionsp. 7
Optionsp. 9
Specifications for an Option Contractp. 9
Uses of Optionsp. 11
Market Structurep. 14
Summaryp. 20
Arbitrage Bounds for Option Pricesp. 21
American Options Compared to European Optionsp. 25
Absolute Maximum and Minimum Valuesp. 25
Summaryp. 39
Pricing Modelsp. 41
General Modeling Principlesp. 42
Choice of Dependent Variablesp. 45
The Binomial Modelp. 48
The Black-Scholes-Merton (BSM) Modelp. 55
Summaryp. 61
The Solution of the Black-Scholes-Merton (BSM) Equationp. 63
Deltap. 67
Gammap. 72
Thetap. 76
Vegap. 80
Summaryp. 88
Option Strategiesp. 89
Forecasting and Strategy Selectionp. 89
The Strategiesp. 93
Summaryp. 116
Volatility Estimationp. 117
Defining and Measuring Volatilityp. 119
Forecasting Volatilityp. 129
Volatility in Contextp. 132
Summaryp. 136
Implied Volatilityp. 137
The Implied Volatility Curvep. 138
Parameterizing and Measuring the Implied Volatility Curvep. 142
The Implied Volatility Curve as a Function of Expirationp. 145
Implied Volatility Dynamicsp. 146
Summaryp. 151
General Principles of Trading and Hedgingp. 153
Edgep. 154
Hedgingp. 156
Trade Sizing and Leveragep. 158
Scalability and Breadthp. 163
Summaryp. 164
Market Making Techniquesp. 165
Market Structurep. 166
Market Makingp. 169
Trading Based on Order-Book Informationp. 181
Summaryp. 189
Volatility Tradingp. 191
Hedgingp. 192
Hedging in Practicep. 193
The P/L Distribution of Hedged Option Positionsp. 203
Summaryp. 213
Expiration Tradingp. 215
Pinningp. 215
Pin Riskp. 219
Forward Riskp. 221
Exercising the Wrong Optionsp. 221
Irrelevance of the Greeksp. 223
Expiring at a Short Strikep. 224
Summaryp. 225
Risk managementp. 227
Example of Position Repairp. 228
Inventoryp. 232
Deltap. 234
Gammap. 234
Vegap. 238
Correlationp. 240
Rhop. 242
Stock Risk: Dividends and Buy-in Riskp. 242
The Early Exercise of Optionsp. 243
Summaryp. 248
Conclusionp. 249
Distributionsp. 253
Examplep. 253
Moments and the "Shape" of Distributionsp. 254
Correlationp. 263
Glossaryp. 271
Indexp. 285
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