Volatility Trading

Informationen zum Autor 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. Klappentext Popular guide to options pricing and position sizing for quant tradersIn 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 strategiesVolatility Trading, Second Edition + Website outlines strategies for defining a true edge in the market using options to trade volatility profitably. Zusammenfassung 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. Inhaltsverzeichnis Acknowledgments xi Introduction to the Second Edition xiii Chapter 1 Option Pricing 1 The Black-Scholes-Merton Model 1 Modeling Assumptions 7 Conclusion 11 Summary 11 Chapter 2 Volatility Measurement 13 Defining and Measuring Volatility 13 Definition of Volatility 14 Alternative Volatility Estimators 20 Using Higher-Frequency Data 29 Summary 33 Chapter 3 Stylized Facts about Returns and Volatility 35 Definition of a Stylized Fact 35 Volatility Is Not Constant 36 Characteristics of the Return Distribution 40 Volume and Volatility 43 Distribution of Volatility 45 Summary 46 Chapter 4 Volatility Forecasting 49 Absence of Transaction Costs 50 Perfect Information Flow 50 Agreement about the Price Implications of Information 50 Maximum Likelihood Estimation 54 Volatility Forecasting Using Fundamental Information 60 The Variance Premium 62 Summary 65 Chapter 5 Implied Volatility Dynamics 67 Volatility Level Dynamics 70 The Smile and the Underlying 80 Smile Dynamics 82 Term Structure Dynamics 90 Summary 91 Chapter 6 Hedging 93 Ad Hoc Hedging Methods 95 Utility-Based Methods 96 Estimation of Transaction Costs 109 Aggregation of Options on Different Underlyings 113 Summary 115 Chapter 7 Distribution of Hedged Option Positions 117 Discrete Hedging and Path Dependency 117 Volatility Dependency 123 Summary 129 Chapter 8 Money Management 131 Ad Hoc Sizing Schemes 131 The Kelly Criterion 133 Time for Kelly to Dominate 143 Effect of Parameter Mis-Estimation 144 What is Bankroll? 146 Alternatives to Kelly 148 Summary 161 Chapter 9 Trade Evaluation 163 General Planning Procedures 164 Risk-Adjusted Performance Measures 171 Setting Goals 178 Persistence of Performance 180 Relative Persistence 180 Summary 184 Chapter 10 Psychology 187 Self-Attribution Bias 191 Overconfidence 193 The Availability Heuris...

List of contents

Acknowledgments xi
 
Introduction to the Second Edition xiii
 
CHAPTER 1 Option Pricing 1
 
The Black-Scholes-Merton Model 1
 
Modeling Assumptions 7
 
Conclusion 11
 
Summary 11
 
CHAPTER 2 Volatility Measurement 13
 
Defining and Measuring Volatility 13
 
Definition of Volatility 14
 
Alternative Volatility Estimators 20
 
Using Higher-Frequency Data 29
 
Summary 33
 
CHAPTER 3 Stylized Facts about Returns and Volatility 35
 
Definition of a Stylized Fact 35
 
Volatility Is Not Constant 36
 
Characteristics of the Return Distribution 40
 
Volume and Volatility 43
 
Distribution of Volatility 45
 
Summary 46
 
CHAPTER 4 Volatility Forecasting 49
 
Absence of Transaction Costs 50
 
Perfect Information Flow 50
 
Agreement about the Price Implications of Information 50
 
Maximum Likelihood Estimation 54
 
Volatility Forecasting Using
 
Fundamental Information 60
 
The Variance Premium 62
 
Summary 65
 
CHAPTER 5 Implied Volatility Dynamics 67
 
Volatility Level Dynamics 70
 
The Smile and the Underlying 80
 
Smile Dynamics 82
 
Term Structure Dynamics 90
 
Summary 91
 
CHAPTER 6 Hedging 93
 
Ad Hoc Hedging Methods 95
 
Utility-Based Methods 96
 
Estimation of Transaction Costs 109
 

Aggregation of Options on Different Underlyings 113
 
Summary 115
 
CHAPTER 7 Distribution of Hedged Option Positions 117
 
Discrete Hedging and Path Dependency 117
 
Volatility Dependency 123
 
Summary 129
 
CHAPTER 8 Money Management 131
 
Ad Hoc Sizing Schemes 131
 
The Kelly Criterion 133
 
Time for Kelly to Dominate 143
 
Effect of Parameter Mis-Estimation 144
 
What is Bankroll? 146
 
Alternatives to Kelly 148
 
Summary 161
 
CHAPTER 9 Trade Evaluation 163
 
General Planning Procedures 164
 
Risk-Adjusted Performance Measures 171
 
Setting Goals 178
 
Persistence of Performance 180
 
Relative Persistence 180
 
Summary 184
 
CHAPTER 10 Psychology 187
 
Self-Attribution Bias 191
 
Overconfidence 193
 
The Availability Heuristic 197
 
Short-Term Thinking 199
 
Loss Aversion 199
 
Conservatism and Representativeness 201
 
Confirmation Bias 203
 
Hindsight Bias 206
 
Anchoring and Adjustment 207
 
The Narrative Fallacy 208
 
Prospect Theory 209
 
Summary 212
 
CHAPTER 11 Generating Returns through Volatility 213
 
The Variance Premium 214
 
Reasons for the Variance Premium 220
 
Summary 222
 
CHAPTER 12 The VIX 223
 
The VIX Index 224
 
VIX Futures 225
 
Volatility ETNs 227
 
Other VIX Trades 229
 
Summary 230
 
CHAPTER 13 Leveraged ETFs 231
 
Leveraged ETFs as a Trade-Sizing Problem 234
 
A Long-Short Trading Strategy 234
 
Options on Leveraged ETFs 235
 
Summary 237
 
CHAPTER 14 Life Cycle of a Trade 239
 
Pretrade Analysis 239
 
Posttrade Analysis 245
 

Summary 247
 
CHAPTER 15 Conclusion 249
 
Summary 252
 
Resources 253
 
Directly Applicable Books 253
 
Thought-Provoking Books 256
 
Useful Websites 257
 
References 261
 
About the Website 273
 
About the Aut

Product details

• Authors: Euan Sinclair
• Publisher: Wiley, John and Sons Ltd
• Languages: English
• Product format: Hardback
• Released: 09.04.2013
• EAN: 9781118347133
• ISBN: 978-1-118-34713-3
• No. of pages: 304
• Series: Wiley Trading; Wiley Trading Series
• Subjects: Social sciences, law, business > Business > Business administration; trading, Börsenhandel, Finance & Investments, Finanz- u. Anlagewesen