Volatility Trading, + CD-ROM



“Written by s mathematically literate trader, this concise guide is full of valuable insights –not just for volatility traders but for quantitative traders too. From Zakamouline's optimal delta-hedging approximation to Browne's optimal trade-sizing policy, there is much interesting technical material that is put to work to provide a framework for thinking clearly about practical problems such as: When should we hedge? Should we double up or cut or position? How much capital should we allocate to a trade in the first place? This book raises the discussion of quantitative trading to a new level and I strongly recommend it.”—Jim Gatheral, author of The Volatility Surface: A Practitioner's Guide

“Euan Sinclair’s Volatility Trading fills a neglected gap in financial literature on trading volatility with options and updates and expands on basic works with contemporary strategies, insights, and technical detail. Volatility Trading is uncommonly clear, examples are well chosen, and explanations are thorough without being tedious. Not since Allan J. Baird's Option Market Making has there been a work on volatility strategies as well written and practical. Sinclair's modern treatment is a tremendous resource for options market makers and clients alike as they inescapably take a view on volatility with each position. Volatility Trading is destined to become a classic and is highly recommended for students and practitioners alike.”—James N. Ward, Head of High-Yield Investments, AXA Investment Managers Paris, and Professor of Finance, The American University of Paris

“I wish this book had been available when I started. I had to discover its contents the hard way. It nicely illustrates what successful plain vanilla option trading is all about: a sound quantitative approach coupled with a few robust principles. It also should help to dispel the myth surrounding volatility trading: that is an obscure and highly complex field of phynancial voodoo that only a gifted few have the ability to understand and master.—FDAXHunter, founding member of

“Euan Sinclair provides a unique and valuable insight into the art and science of option trading. With clarity and purpose, he demonstrates how the successful option trader judiciously selects the appropriate quantitative tools for the job–neither too rudimentary nor too complex but just right for each stage of the trading process. I strongly recommend this book to volatility traders and all options who wish to see 'behind the curtain' of option pricing.”—Carl Mason, Chief U.S. Equity Derivatives Strategist, Morgan Stanley

Euan Sinclair is an option trader with over ten years of experience trading options professionally. 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.

The Trading Process.

Chapter 1. Option Pricing.

The Black-Scholes-Merton Model.


Chapter 2. Volatility Measurement and Forecasting.

Defining and Measuring Volatility.

Definition of Volatility.

Alternative Volatility Estimators.

Using Higher-Frequency Data.

Forecasting Volatility.

Forecasting the Volatility Distribution.


Chapter 3. Implied Volatility Dynamics.

Volatility Level Dynamics.

Smile Dynamics.


Chapter 4. Hedging.

Ad Hoc Hedging Methods.

Utility Based Methods.

Estimation of Transaction Costs.

Aggregation of Options on Different Underlyings.


Chapter 5. Hedged Option Positions.

Discrete Hedging and Path Dependency.

Volatility Dependency.


Chapter 6. Money Management.

Ad Hoc Schemes.

The Kelly Criterion.

Alternatives to the Kelly Criterion.

Trade Sizing in a Continuously Changing Setting.


Chapter 7. Trade Evaluation.

General Planning Procedures.

Risk-Adjusted Performance Measures.

Setting Goals.

Persistence of Performance.


Chapter 8. Psychology.

Self-Attribution Bias.


The Availability Heuristic.

Short-Term Thinking.

Loss Aversion.

Conservatism and Representativeness.

Confirmation Bias.

Hindsight Bias.

Anchoring and Adjustment.


Chapter 9. Life Cycle of a Trade.

Pretrade Analysis.

Post-Trade Analysis.


Chapter 10. Conclusion.

Execution Ability.


Product Selection.

Appendix A. Model-Free Implied Variance and Volatility.

The VIX Index.

Appendix B. Spreadsheet Instructions.


Volatility Cones and Skew and Kurtosis Cones.

Daily Option Hedging Simulation.

Trade Evaluation.

Trading Goals.

Corrado-Su Skew Curve.

Mean Reversion Simulator.


Essential Books.

Thought-Provoking Books.

Useful Web Sites.


About the CD-ROM.