Option Trading Pricing and Volatility Strategies and Techniques

by Sinclair, Euan

• ISBN13: 9780470497104
• ISBN10: 0470497106
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-06-21
• Publisher: Wiley

Summary

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

Preface	p. xi
Professional Trading	p. xii
The Role of Mathematics	p. xiv
The Structure of this Book	p. xvi
Acknowledgments	p. xix
History	p. 1
Summary	p. 6
Introduction to Options	p. 7
Options	p. 9
Specifications for an Option Contract	p. 9
Uses of Options	p. 11
Market Structure	p. 14
Summary	p. 20
Arbitrage Bounds for Option Prices	p. 21
American Options Compared to European Options	p. 25
Absolute Maximum and Minimum Values	p. 25
Summary	p. 39
Pricing Models	p. 41
General Modeling Principles	p. 42
Choice of Dependent Variables	p. 45
The Binomial Model	p. 48
The Black-Scholes-Merton (BSM) Model	p. 55
Summary	p. 61
The Solution of the Black-Scholes-Merton (BSM) Equation	p. 63
Delta	p. 67
Gamma	p. 72
Theta	p. 76
Vega	p. 80
Summary	p. 88
Option Strategies	p. 89
Forecasting and Strategy Selection	p. 89
The Strategies	p. 93
Summary	p. 116
Volatility Estimation	p. 117
Defining and Measuring Volatility	p. 119
Forecasting Volatility	p. 129
Volatility in Context	p. 132
Summary	p. 136
Implied Volatility	p. 137
The Implied Volatility Curve	p. 138
Parameterizing and Measuring the Implied Volatility Curve	p. 142
The Implied Volatility Curve as a Function of Expiration	p. 145
Implied Volatility Dynamics	p. 146
Summary	p. 151
General Principles of Trading and Hedging	p. 153
Edge	p. 154
Hedging	p. 156
Trade Sizing and Leverage	p. 158
Scalability and Breadth	p. 163
Summary	p. 164
Market Making Techniques	p. 165
Market Structure	p. 166
Market Making	p. 169
Trading Based on Order-Book Information	p. 181
Summary	p. 189
Volatility Trading	p. 191
Hedging	p. 192
Hedging in Practice	p. 193
The P/L Distribution of Hedged Option Positions	p. 203
Summary	p. 213
Expiration Trading	p. 215
Pinning	p. 215
Pin Risk	p. 219
Forward Risk	p. 221
Exercising the Wrong Options	p. 221
Irrelevance of the Greeks	p. 223
Expiring at a Short Strike	p. 224
Summary	p. 225
Risk management	p. 227
Example of Position Repair	p. 228
Inventory	p. 232
Delta	p. 234
Gamma	p. 234
Vega	p. 238
Correlation	p. 240
Rho	p. 242
Stock Risk: Dividends and Buy-in Risk	p. 242
The Early Exercise of Options	p. 243
Summary	p. 248
Conclusion	p. 249
Distributions	p. 253
Example	p. 253
Moments and the "Shape" of Distributions	p. 254
Correlation	p. 263
Glossary	p. 271
Index	p. 285
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