Positional Option Trading - An Advanced Guide

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.

List of contents

Introduction xi
 
Trading as a Process xiii
 
Summary xv
 
Chapter 1 Options: A Summary 1
 
Option Pricing Models 1
 
Option Trading Theory 4
 
Conclusion 10
 
Summary 10
 
Chapter 2 The Efficient Market Hypothesis and Its Limitations 11
 
The Efficient Market Hypothesis 11
 
Aside: Alpha Decay 15
 
Behavioral Finance 16
 
High-Level Approaches: Technical Analysis and Fundamental Analysis 21
 
Conclusion 27
 
Summary 27
 
Chapter 3 Forecasting Volatility 29
 
Model-Driven Forecasting and Situational Forecasting 30
 
The GARCH Family and Trading 33
 
Implied Volatility as a Predictor 36
 
Ensemble Predictions 36
 
Conclusion 38
 
Summary 38
 
Chapter 4 The Variance Premium 39
 
Aside: The Implied Variance Premium 40
 
Variance Premium in Equity Indices 42
 
The Implied Skewness Premium 46
 
The Implied Correlation Premium 47
 
Commodities 47
 
Bonds 49
 
The VIX 50
 
Currencies 50
 
Equities 50
 
Reasons for the Variance Premium 51
 
Insurance 52
 
Jump Risk 52
 
Trading Restrictions 52
 
Market-Maker Inventory Risk 52
 
Path Dependency of Returns 53
 
The Problem of the Peso Problem 55
 
Conclusion 56
 
Summary 56
 
Chapter 5 Finding Trades with Positive Expected Value 57
 
Aside: Crowding 57
 
Trading Strategies 61
 
Options and Fundamental Factors 63
 
Post-Earnings Announcement Drift (PEAD) 68
 
Confidence Level Two 71
 
The Overnight Effect 75
 
FOMC and Volatility 75
 
The Weekend Effect 77
 
Volatility of Volatility Risk Premia 78
 
Confidence Level One 80
 
Earnings-Induced Reversals 80
 
Pre-Earnings Announcement Drift 81
 
Conclusion 82
 
Summary 83
 
Chapter 6 Volatility Positions 85
 
Aside: Adjustment and Position ''Repair'' 86
 
Straddles and Strangles 86
 
Aside: Delta-Hedged Positions 93
 
Butterflies and Condors 95
 
Aside: Broken Wing Butterflies and Condors 99
 
Calendar Spread 100
 
Including Implied Volatility Skew 102
 
Strike Choice 104
 
Choosing a Hedging Strike 107
 
Expiration Choice 109
 
Conclusion 111
 
Summary 111
 
Chapter 7 Directional Option Trading 113
 
Subjective Option Pricing 113
 
A Theory of Subjective Option Pricing 115
 
Distribution of Option Returns: Summary Statistics 118
 
Strike Choice 120
 
Fundamental Considerations 124
 
Conclusion 124
 
Summary 125
 
Chapter 8 Directional Option Strategy Selection 127
 
Long Stock 128
 
Long Call 129
 
Long Call Spread 130
 
Short Put 131
 
Covered Calls 131
 
Components of Covered Call Profits 134
 
Covered Calls and Fundamentals 136
 
Short Put Spread 137
 
Risk Reversal 138
 
Aside: The Risk Reversal as a Skew Trade 141
 
Ratio Spreads 142
 
Conclusion 145
 
Summary 145
 
Chapter 9 Trade Sizing 147
 
The Kelly Criterion 147
 
Non-normal Discrete Outcomes 149
 
Non-normal Continuous Outcomes 151
 
Uncertain Parameters 154
 
Kelly and Drawdown Control 158
 
The Effect of Stops 161
 
Conclusion 170
 
Summary 170
 
Chapter 10 Meta Risks 171
 
Currency Ris

About the author

Euan Sinclair, PhD, is an options trader and financial engineer at Hull Tactical. He holds a doctorate in theoretical physics from the University of Bristol.

Summary

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.

Product details

• Authors: Sinclair, E Sinclair, Euan Sinclair, Euan (University of Bristol) Sinclair
• Publisher: Wiley, John and Sons Ltd
• Languages: English
• Product format: Hardback
• Released: 30.06.2020
• EAN: 9781119583516
• ISBN: 978-1-119-58351-6
• No. of pages: 240
• Series: Wiley Trading; Wiley Trading Series
• Subjects: Social sciences, law, business > Business > Business administration; Strategisches Management, trading, Börsenhandel, Business / Economics / Finance, BUSINESS & ECONOMICS / Investments & Securities / Options, BUSINESS & ECONOMICS / Investments & Securities / Analysis & Trading Strategies, Finance & Investments, Finanz- u. Anlagewesen