Volatility Trading, by Euan Sinclair: Book Review & Summary

Volatility Trading, by Euan Sinclair

My Book Review & Summary

“Even if traders can profitably trade both volatility and the direction of the underlying, they should not forget that these will now be two separate strategies: Volatility trading is not dependent on the ability to trade directionally.”~ Euan Sinclair, Volatility Trading

Volatility Trading is much more of an academic approach than a typical options trading book. This is standard for Euan Sinclair books, who has a background in mathematics, and this one reads more like a college textbook than a trader’s strategy book. If you’re interested in options models, competing theories, and in-depth technical math behind options analysis, then this is the book for you. If you’re looking more for just purely options trading information but at a similar high level, then I would recommend Euan Sinclair’s options trading book, Positional Option Trading, which also happens to be one of my all-time favorite options trading books. 

Volatility Trading, like it’s name implies, is focused on volatility. Understanding, measuring, and forecasting volatility through many different models and theories. 

This was not a quick book to read, considering how short it is, because of the different equations and models throughout the book. Some of them took quite a bit of time to work through in my head. 

This book reminds me a lot of Nassim Taleb’s Dynamic Hedging book. So if you e read that and enjoyed it, then this is right up your alley.

Trade Evaluation

“Focus on what works and stop doing what doesn’t.”~ Euan Sinclair, Volatility Trading

There are a few trader focused chapters of the book, including psychology, money management, and trade evaluations. The trade evaluation section of the book is probably where I picked up the most useful information.

Very few people put in the time that’s necessary to properly evaluate their trades. After evaluating the trades, do you associate some of them with good luck or bad luck? You need to understand what you traded and then properly assess the final outcome before you’ll know if you have been lucky or if you really have an edge.

I also like this concept of only focusing on what you’re good at and where you find your own edge in trading:

“After you have been tracking your results for a while you will be in a position to see what has been working and what hasn't. The incorrect thing to do is to work on the things that have been weak. Trading is not a sport.

For example, if you want to improve your golf it probably makes sense to spend time practicing the weaker parts of your game. Improving these will improve your game and it is also likely that there is more room for easier improvement. However, in trading you don't have to do all kinds of trades. You are perfectly free to do only the types that work for you.

It seems that traders who are good at one or two types of trades become scared that those things will stop working and decide they need to diversify. Or possibly they are simply overconfident and think if they can succeed at one thing they can succeed at five.

It is always important to try new things, as the concern of a finite trade lifetime is somewhat valid. But it is far more important to push the things that are working. A major danger in trading is not taking the most money out of a strategy when it is working.”~ Euan Sinclair, Volatility Trading

My Thoughts on Volatility Trading

After awhile I started to just skim through the math behind many of the equations and models. They don’t feel necessary to me. There is a good amount of high level trading information in this book, but it’s also talked about at length in his other books that I’ve already read, so this book didn’t really give me much to come back to. I understand how someone could really love this book, but I like topics to be simplified down enough that I can fully digest them and then build off that knowledge. These equations would take me down a road that seems like a dead-end that I don’t have time to go down.

If you've made it this far, you must be into volatility trading, in which I would really recommend checking out Trading Options as a Professional, by James Bittman. This is a market makers option trading book, with a focus on volatility trading.