Volatility Trading, + Website

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 xiIntroduction to the Second Edition xiiiChapter 1 Option Pricing 1The Black-Scholes-Merton Model 1Modeling Assumptions 7Conclusion 11Summary 11Chapter 2 Volatility Measurement 13Defining and Measuring Volatility 13Definition of Volatility 14Alternative Volatility Estimators 20Using Higher-Frequency Data 29Summary 33Chapter 3 Stylized Facts about Returns and Volatility 35Definition of a Stylized Fact 35Volatility Is Not Constant 36Characteristics of the Return Distribution 40Volume and Volatility 43Distribution of Volatility 45Summary 46Chapter 4 Volatility Forecasting 49Absence of Transaction Costs 50Perfect Information Flow 50Agreement about the Price Implications of Information 50Maximum Likelihood Estimation 54Volatility Forecasting Using Fundamental Information 60The Variance Premium 62Summary 65Chapter 5 Implied Volatility Dynamics 67Volatility Level Dynamics 70The Smile and the Underlying 80Smile Dynamics 82Term Structure Dynamics 90Summary 91Chapter 6 Hedging 93Ad Hoc Hedging Methods 95Utility-Based Methods 96Estimation of Transaction Costs 109Aggregation of Options on Different Underlyings 113Summary 115Chapter 7 Distribution of Hedged Option Positions 117Discrete Hedging and Path Dependency 117Volatility Dependency 123Summary 129Chapter 8 Money Management 131Ad Hoc Sizing Schemes 131The Kelly Criterion 133Time for Kelly to Dominate 143Effect of Parameter Mis-Estimation 144What is Bankroll? 146Alternatives to Kelly 148Summary 161Chapter 9 Trade Evaluation 163General Planning Procedures 164Risk-Adjusted Performance Measures 171Setting Goals 178Persistence of Performance 180Relative Persistence 180Summary 184Chapter 10 Psychology 187Self-Attribution Bias 191Overconfidence 193The Availability Heuristic 197Short-Term Thinking 199Loss Aversion 199Conservatism and Representativeness 201Confirmation Bias 203Hindsight Bias 206Anchoring and Adjustment 207The Narrative Fallacy 208Prospect Theory 209Summary 212Chapter 11 Generating Returns through Volatility 213The Variance Premium 214Reasons for the Variance Premium 220Summary 222Chapter 12 The VIX 223The VIX Index 224VIX Futures 225Volatility ETNs 227Other VIX Trades 229Summary 230Chapter 13 Leveraged ETFs 231Leveraged ETFs as a Trade-Sizing Problem 234A Long-Short Trading Strategy 234Options on Leveraged ETFs 235Summary 237Chapter 14 Life Cycle of a Trade 239Pretrade Analysis 239Posttrade Analysis 245Summary 247Chapter 15 Conclusion 249Summary 252Resources 253Directly Applicable Books 253Thought-Provoking Books 256Useful Websites 257References 261About the Website 273About the Author 279Index 281