Volatility Trading by Euan Sinclair

A review of the 2nd Edition by , CEO of Volcube.

Options books for beginners are everywhere, traditionally aimed at retail option punters or very junior traders. For more advanced users of options (i.e. those trading them hedged, as volatility instruments), the reading material has always been much thinner on the ground. Volatility Trading, published in 2008, helped fill this void and the new edition only strengthens its claim to being the closest thing vol traders have to a must-read guide.

The text is informal and accessible. There is a fair amount of mathematics (mainly pitched at undergraduate level) to present proofs of the ideas that are explained in plain English. However, it is not essential to follow this line by line to extract the practical point being made. Typically Sinclair raises a questions such as ‘how to hedge?’, and then looks various mathematical treatments of the problem before converting this into actual usable ideas and strategies. This in itself is quite unique; most ‘advanced’ options books either focus on the intuitive or they stick to the dry theories. The result is that I think this book is going to be useful to both quants and traders. Where there are competing theories about say how to measure volatility (and there are many), Sinclair is careful to point out pros and cons dispassionately. A theme throughout is that although every model discussed is essentially inadequate, its use is not thereby invalidated. Sinclair seems to favour models that are parsimonious (ie relatively simple) and whose failings are very well known (such as Black-Scholes pricing, Sharpe Ratios etc.). This is a pragmatic approach that traders will empathise with perhaps more than quants.

The section on psychology has been expanded upon, mirroring the heightened interest in this field since specifically since the crash of ’08. It introduces several ideas that will be familiar to fans of Gladwell, Kahneman, Pinker et al. but in the context of the derivatives market. This is an area of study in its infancy but some key results on bias, confidence and anchoring are undoubtedly (to my mind) relevant to traders. Read this chapter as a spring-board to other reading if this is new to you.

The resources in the appendices are useful. I tried out the accompanying resources on the website (especially creating the volatility cone for a stock using Yahoo finance historical data). This worked fine and is a useful piece of kit.

All in all, this edition is an improvement on what was already an excellent text. I’d recommend this to quants and junior traders. Older heads will also learn something new.

SG, April 2013

You can order the book here….


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