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. 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. Acknowledgments Introduction to the Second Edition About This Book The Trading Process Chapter 1 Option Pricing The Black-Scholes Merton Model Existence of a Tradable Underlying Absence of Dividends or Storage Costs Ability to Short the Underlying The Existence of a Single Constant Interest Rate Absence of Taxes The Underlying can be Traded in any Size It is Costless to Trade the Underlying Volatility is Constant Assumptions about the Distribution of Returns Conclusion Summary Chapter 2 Volatility Measurement Defining and Measuring Volatility Definition of Volatility Alternative Volatility Estimators Using Higher-Frequency Data Summary Chapter 3 Stylized Facts about Returns and Volatility Definition of a Stylized Fact Volatility is Not Constant Characteristics of the Return Distribution Volume and Volatility Distribution of Volatility Summary Chapter 4 Volatility Forecasting Absence of Transaction Costs Perfect Information Flow Agreement About the Price Implications of Information Maximum Likelihood Estimation Volatility Forecasting Using Fundamental Information The Variance Premium Summary Chapter 5 Implied Volatility Dynamics Volatility Level Dynamics The Smile and the Underlying Smile Dynamics Term Structure Dynamics Summary Chapter 6 Hedging Ad Hoc Hedging Methods Utility-Based Methods Estimation of Transaction Costs Aggregation of Options on Different Underlyings Summary Chapter 7 Distribution of Hedged Option Positions Discrete Hedging and Path Dependency Volatility Dependency Summary Chapter 8 Money Management Ad Hoc Sizing Schemes The Kelly Criterion Summary Chapter 9 Trade Evaluation General Planning Procedures Risk-Adjusted Performance Measures Setting Goals Persistence of Performance Summary Chapter 10 Psychology Self-Attribution Bias Overconfidence The Availability Heuristic Short-Term Thinking Loss Aversion Conservatism and Representativeness Confirmation Bias Hindsight Bias Anchoring and Adjustment The Narrative fallacy Prospect Theory Summary Chapter 11 Generating Returns through Volatility The Variance Premium Reasons for the Variance Premium Summary Chapter 12 The VIX The VIX Index VIX Futures Volatility ETNs Other VIX Trades Summary Chapter 13 Leveraged ETFs Leveraged ETFs as a Trade Sizing Problem A Long-Short Trading Strategy Options on Leveraged ETFs Summary Chapter 14 Life Cycle of a Trade Pretrade Analysis Post-Trade Analysis Summary Chapter 15 Conclusion Execution Ability Concentration Product Selection Summary Appendix: Spreadsheet Instructions GARCH Volatility Cones and Skew and Kurtosis Cones Daily Option Hedging Simulation Trade Evaluation Trading Goals Corrado-Su Skew Curve Mean Reversion Simulator Resources Directly Applicable Books Thought-Provoking Books Useful Web Sites References About the Author About the Companion Website Index