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Your goal, Sinclair explains, must be clearly defined and easily expressed–if you cannot explain it in one sentence, you probably aren′t completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn′t trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals.
As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful. This book, and its companion CD–ROM, will provide that knowledge. The CD–ROM includes spreadsheets designed to help you forecast volatility and evaluate trades together with simulation engines.
From the Inside Flap
In Volatility Trading, Sinclair offers you a quantitative model for measuring volatility in or–der to gain an edge in your 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. In addition, Sinclair explains the often–overlooked psychological aspects of trading, revealing both how behavioral psychology can create market conditions traders can take advantage of—and how it can lead them astray. Psychological biases, he asserts, are probably the drivers behind most sources of edge available to a volatility trader.
Your goal, Sinclair explains, must be clearly defined and easily expressed—if you cannot explain it in one sentence, you probably aren′t completely clear about what it is. The same applies to your statistical edge. If you do not know exactly what your edge is, you shouldn′t trade. He shows how, in addition to the numerical evaluation of a potential trade, you should be able to identify and evaluate the reason why implied volatility is priced where it is, that is, why an edge exists. This means it is also necessary to be on top of recent news stories, sector trends, and behavioral psychology. Finally, Sinclair underscores why trades need to be sized correctly, which means that each trade is evaluated according to its projected return and risk in the overall context of your goals.
As the author concludes, while we also need to pay attention to seemingly mundane things like having good execution software, a comfortable office, and getting enough sleep, it is knowledge that is the ultimate source of edge. So, all else being equal, the trader with the greater knowledge will be the more successful. This book, and its companion CD–ROM, will provide that knowledge. The CD–ROM includes spreadsheets designed to help you forecast volatility and evaluate trades together with simulation engines.
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Customer Reviews
So far one has the choice between an introductory (yet subtle) options book like Baird describing market making in options, or more abstract quantitative finance books focusing on option pricing formulas. Euan Sinclair's book focuses where the meat hits the table: options trading. Being the opposite of a recipes of dodgy trading systems, Volatility trading teaches the reader to be the chef preparing himself the quantitative sauce. Few trading books focus on understanding the basics of a sound trading approach, namely placing more emphasis on the process rather than the results.
After opening with an derivation of the black-scholes formula, the author addresses volatility measurements and forecasts. It is made sure that the reader understands the biases, pros and cons of all the standard volatility estimators. The basics of implied volatility dynamics are spelled out. Then hedging is thoroughly discussed, in particular the numerical approaches to 'real life' discrete hedging. Surprisingly, there is a chapter on money management, a important practical and often overlooked matter. Contrary to many trading book not going beyond simplistic approaches of betting, subtle properties of fractional and progressive money management are discussed. The psychology chapter is a nice review of the main behavioural finance topics. The rest of the book focuses on trade evaluation and the life cycle of a trade, in line with the spirit of the book: highlighting the processes.
Interestingly, this book can be of great help for the quantitative finance student who wants to understand more about trading - and it can patch their usual weakness in terms of not really understanding 'how the market works' which is common fresh out of university. It will also be of useful for the mathematically inclined finance student who wants to beef up its quantitative understanding of black-scholes. For practitioners of options trading, it is certainly a great review of the current way to build robust trading tools. The exhaustive references to the original papers alone make Volatility trading a valuable book. For traders focusing on other asset classes (like myself) it is a great opportunity to get an overview of how things are done in practice when evaluating an options trade.
In summary, whether you are a seasoned trader looking to improve your game or a student wanting to beef up for interviews, I highly recommend this book about volatility trading.
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