Positional Options Trading, by Euan Sinclair
My Book Review & Summary
Positional Options Trading is the best Euan Sinclair book available, in my opinion. It covers topics that are a bit more on the advanced trader levels so I wouldn’t really recommend this early in a trading career. These are topics that you need to understand if you are trying to run a large options trading account or potentially a hedge fund at some point. There’s a few topics in this book that were a bit over my head mainly because of the calculations involved, but when reading those parts I couldn’t imagine them being very useful outside of theoretical knowledge (Sinclair has a mathematics background and you can tell with his books). But overall, there’s a huge amount of great information here that I plan to come back to often. This was one that used up a lot of my highlighter.
Risk Premia vs Real Inefficiencies
This is the real concept of the book. If we assume the Efficient Market Hypothesis isn’t exactly perfect, that means there are actually chances to make money in the markets. These chances to make money can be divided into two buckets: risk premia and inefficiencies. Risk premia are basically the rewards you get for taking on extra risk; if these rewards aren’t priced quite right, you can come out ahead even after factoring in the risk. Inefficiencies, on the other hand, are those moments when the market simply misses something, opening up opportunities for traders to take advantage.
“It is often impossible to know whether a given opportunity is a risk premium or an inefficiency, and a given opportunity will probably be partially both. But it is important to try to differentiate. A risk premium can be expected to persist: the counterparty is paying for insurance against a risk. They may improve their pricing of the insurance, but they will probably continue to pay something.
By contrast, an inefficiency will last only until other people notice it. And failing to differentiate between a real opportunity and a chance event will only lead to losses.”Euan Sinclair, Positional Option Trading
Positional Option Trading
An advanced guide to sophisticated positional options strategies from the prestigious Wiley Trading series. Master longer-term options approaches, learn complex multi-leg positioning, and develop institutional-grade techniques for maximizing profits while managing risk in trending and volatile markets.
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Finding Edge in Non-Typical Options Trade Setups
Sinclair talks through a few of his favorite trading setups explaining where these trades get their edge, and he shows exactly how to trade the strategy. There is also historical data backing up each of these trades:
- Trading around Earnings
- Trading the Weekend Effect
- Trading the Overnight Effect
- Trading FOMC volatility
Post Earnings Announcement Drift (PEAD)
“stock prices tend to increase (decrease) after earnings announcements with positive (negative) earnings surprises. This wasn't greatly shocking. What was unexpected was that the outperformance didn't happen abruptly but accumulated over three months. The stock prices did incorporate the news but did so slowly. In fact, the prices reacted so slowly that the effect was tradable. This effect is inconsistent with the concept of efficient markets, where the information contained in an earnings report should be quickly incorporated in prices”Euan Sinclair, Positional Option Trading
How to trade PEAD:
“because implied volatility tends to be comparatively cheap after earning releases, this is an effect that can be traded from the long side. For stocks with positive earnings surprises, being long a short-dated 40 delta/10 delta call spread is usually a cheap way to leverage PEAD. For bearish positions a 50 delta/20 delta put spread achieves the same effect while also selling one of the most expensive parts of the implied volatility curve.”Euan Sinclair, Positional Option Trading
Sinclair’s Favorite Bullish Trade: Risk Reversal
The risk reversal trade is an excellent strategy to profit from implied variance premium.
“In most markets, we will be benefiting from selling the 20-delta put at an inflated volatility and, at least for indices, we will be buying the 20-delta call at a volatility under that of the ATM. For the S&P 500, the 20-delta call currently has a volatility of about 0.77 of the ATM volatility. The fact the position performs better when there is a skew is entirely due to the extra premium we collect. The initial value of this position is a credit of $330.
Because we can collect a reasonable premium from this position, we can still buy a teeny put to hedge the downside risk. For example, the implied volatility of a 5-delta index put is usually about 1.7 times the ATM volatility.
This downside hedged risk reversal is my personal favorite bullish directional position.
- It has limited downside risk.
- It has the potential for large wins
- It takes advantage of the skew premium
Euan Sinclair, Positional Option Trading
My Thoughts on Positional Options Trading by Euan Sinclair
This book will likely end up on my all-time best options trading book list. Some of the info is theoretical and doesn’t come into play in what I do with trading, but the majority of the book is extremely useful, and Sinclair has a unique style of writing that I enjoy. If you’re serious about learning options for a lifetime of trading, read this book.
If you've made it this far, I'd really recommend checking out my book review and summary of The Option Trader's Hedge Fund. It's another high level options trading book that is also short and sweet.
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