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Option Trading: Pricing and Volatility Strategies and Techniques

Book Description

An A to Z options trading guide for the new millennium and the new economy

Written by professional trader and quantitative analyst Euan Sinclair, Option Trading is a comprehensive guide to this discipline covering everything from historical background, contract types, and market structure to volatility measurement, forecasting, and hedging techniques.

This comprehensive guide presents the detail and practical information that professional option traders need, whether they're using options to hedge, manage money, arbitrage, or engage in structured finance deals. It contains information essential to anyone in this field, including option pricing and price forecasting, the Greeks, implied volatility, volatility measurement and forecasting, and specific option strategies.

  • Explains how to break down a typical position, and repair positions

  • Other titles by Sinclair: Volatility Trading

  • Addresses the various concerns of the professional options trader

Option trading will continue to be an important part of the financial landscape. This book will show you how to make the most of these profitable products, no matter what the market does.

Table of Contents

  1. Title Page
  2. Copyright Page
  3. Dedication
  4. Preface
    1. PROFESSIONAL TRADING
    2. THE ROLE OF MATHEMATICS
    3. THE STRUCTURE OF THIS BOOK
  5. Acknowledgments
  6. CHAPTER 1 - History
    1. SUMMARY
  7. CHAPTER 2 - Introduction to Options
    1. OPTIONS
    2. SPECIFICATIONS FOR AN OPTION CONTRACT
    3. USES OF OPTIONS
    4. MARKET STRUCTURE
    5. SUMMARY
  8. CHAPTER 3 - Arbitrage Bounds for Option Prices
    1. AMERICAN OPTIONS COMPARED TO EUROPEAN OPTIONS
    2. ABSOLUTE MAXIMUM AND MINIMUM VALUES
    3. SUMMARY
  9. CHAPTER 4 - Pricing Models
    1. GENERAL MODELING PRINCIPLES
    2. CHOICE OF DEPENDENT VARIABLES
    3. THE BINOMIAL MODEL
    4. THE BLACK-SCHOLES-MERTON (BSM) MODEL
    5. SUMMARY
  10. CHAPTER 5 - The Solution of the Black-Scholes-Merton (BSM) Equation
    1. DELTA
    2. GAMMA
    3. THETA
    4. VEGA
    5. SUMMARY
  11. CHAPTER 6 - Option Strategies
    1. FORECASTING AND STRATEGY SELECTION
    2. THE STRATEGIES
    3. SUMMARY
  12. CHAPTER 7 - Volatility Estimation
    1. DEFINING AND MEASURING VOLATILITY
    2. FORECASTING VOLATILITY
    3. VOLATILITY IN CONTEXT
    4. SUMMARY
  13. CHAPTER 8 - Implied Volatility
    1. THE IMPLIED VOLATILITY CURVE
    2. PARAMETERIZING AND MEASURING THE IMPLIED VOLATILITY CURVE
    3. THE IMPLIED VOLATILITY CURVE AS A FUNCTION OF EXPIRATION
    4. IMPLIED VOLATILITY DYNAMICS
    5. SUMMARY
  14. CHAPTER 9 - General Principles of Trading and Hedging
    1. EDGE
    2. HEDGING
    3. TRADE SIZING AND LEVERAGE
    4. SCALABILITY AND BREADTH
    5. SUMMARY
  15. CHAPTER 10 - Market Making Techniques
    1. MARKET STRUCTURE
    2. MARKET MAKING
    3. TRADING BASED ON ORDER-BOOK INFORMATION
    4. SUMMARY
  16. CHAPTER 11 - Volatility Trading
    1. HEDGING
    2. HEDGING IN PRACTICE
    3. THE P/L DISTRIBUTION OF HEDGED OPTION POSITIONS
    4. SUMMARY
  17. CHAPTER 12 - Expiration Trading
    1. PINNING
    2. PIN RISK
    3. FORWARD RISK
    4. EXERCISING THE WRONG OPTIONS
    5. IRRELEVANCE OF THE GREEKS
    6. EXPIRING AT A SHORT STRIKE
    7. SUMMARY
  18. CHAPTER 13 - Risk Management
    1. EXAMPLE OF POSITION REPAIR
    2. INVENTORY
    3. DELTA
    4. GAMMA
    5. VEGA
    6. CORRELATION
    7. RHO
    8. STOCK RISK: DIVIDENDS AND BUY-IN RISK
    9. THE EARLY EXERCISE OF OPTIONS
    10. SUMMARY
  19. Conclusion
  20. APPENDIX A: Distributions
  21. APPENDIX B: Correlation
  22. Glossary
  23. Index