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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.
Acknowledgments
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
Conclusion
Summary
Chapter 2 Volatility Measurement
Defining and Measuring Volatility
Definition of Volatility
Alternative Volatility Estimators
Using Higher-Frequency Data
Summary
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
Summary
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
Summary
Chapter 5 Implied Volatility Dynamics
Volatility Level Dynamics
The Smile and the Underlying
Smile Dynamics
Term Structure Dynamics
Summary
Chapter 6 Hedging
Ad Hoc Hedging Methods
Utility-Based Methods
Estimation of Transaction Costs
Aggregation of Options on Different Underlyings
Summary
Chapter 7 Distribution of Hedged Option Positions
Discrete Hedging and Path Dependency
Volatility Dependency
Summary
Chapter 8 Money Management
Ad Hoc Sizing Schemes
The Kelly Criterion
Summary
Chapter 9 Trade Evaluation
General Planning Procedures
Risk-Adjusted Performance Measures
Setting Goals
Persistence of Performance
Summary
Chapter 10 Psychology
Self-Attribution Bias
Overconfidence
The Availability Heuristic
Short-Term Thinking
Loss Aversion
Conservatism and Representativeness
Confirmation Bias
Hindsight Bias
Anchoring and Adjustment
The Narrative fallacy
Prospect Theory
Summary
Chapter 11 Generating Returns through Volatility
The Variance Premium
Reasons for the Variance Premium
Summary
Chapter 12 The VIX
The VIX Index
VIX Futures
Volatility ETNs
Other VIX Trades
Summary
Chapter 13 Leveraged ETFs
Leveraged ETFs as a Trade Sizing Problem
A Long-Short Trading Strategy
Options on Leveraged ETFs
Summary
Chapter 14 Life Cycle of a Trade
Pretrade Analysis
Post-Trade Analysis
Summary
Chapter 15 Conclusion
Execution Ability
Concentration
Product Selection
Summary
Appendix: Spreadsheet Instructions
GARCH
Volatility Cones and Skew and Kurtosis Cones
Daily Option Hedging Simulation
Trade Evaluation
Trading Goals
Corrado-Su Skew Curve
Mean Reversion Simulator
Resources
Directly Applicable Books
Thought-Provoking Books
Useful Web Sites
References
About the Author
About the Companion Website
Index
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The Used, Rental and eBook copies of this book are not guaranteed to include any supplemental materials. Typically, only the book itself is included. This is true even if the title states it includes any access cards, study guides, lab manuals, CDs, etc.
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