Quantitative Analysis 53: 1–63.
Hubbard, D. W. 2007. How to Measure Anything: Finding the
Value of Intangibles in Business. 3rd ed. New York: Wiley.
Hull, J., and A. White. 2017. “Optimal Delta Hedging for Options.”
Journal of Banking and Finance 82: 180–190.
Ioannidis, J. 2005. “Why Most Published Research Findings Are
False.” PLoS Medicine 2: e124.
Israelov, R., and H. Tummala. 2017. “Which Index Options
Should You Sell.” SSRN: 2990542.
Jansen, I., and A. Nikiforov. 2016. “Fear and Greed: A Returns-
Based Trading Strategy around Earnings Announcements.”
Journal of Portfolio Management 42: 88–95.
Jenkinson, T., H. Jones, and J. Martinez. 2015. “Picking Winners?
Investment Consultants' Recommendations of Fund
Managers.” The Journal of Finance 71: 2333–2370.
Jones, C., O. Lamont, and R. Lumsdaine. 1998. “Macroeconomic
News and Bond Market Volatility.” Journal of Financial
Economics 47: 315–337.
239
Jones, C., and J. Shemesh. 2017. “Option Mispricing around
Nontrading Periods.” The Journal of Finance 73: 861–900.
Jung, D. 2000. “The Model Risk of Option Pricing Models When
Volatility Is Stochastic: A Monte Carlo Simulation Approach.”
PhD dissertation, University of Missouri–Columbia.
Jung, D., and C. Corrado. 2009. “Tweaking Black Scholes.” SSRN:
1330248.
Kaeck, A. 2017. “Variance-of-Variance Risk Premium.” Review of
Finance 22: 1549–1579.
Katona, G. 1975. Psychological Economics. New York: Elsevier.
Kelly, B., and H. Jiang. 2014. “Tail Risk and Asset Prices.” Review
of Financial Studies 27: 2841–2871.
Kelly, J. 1956. “A New Interpretation of Information Rate.” Bell
System Technical Journal 35: 917–926.
Keynes, J. M. 1930. A Treatise on Money. London: MacMillan.
Kim, Y.-J. 2002. “Option Pricing under Stochastic Interest Rates:
An Empirical Investigation.” Asia-Pacific Financial Markets 9:
23–44.
Kipling, R. 1910. “If” in Rewards and Fairies. London: Doubleday.
Knight, F. 1921. Risk, Uncertainty, and Profit. Boston: Houghton
Mifflin.
Koijen, R., M. Schmeling, and E. Vrugt. 2015. “Survey
Expectations of Returns and Asset Pricing Puzzles.” London
Business School IFA working paper.
Kozhan, R., A. Neuberger, and P. Schneider. 2011. “The Skew Risk
Premium in Index Option Prices.” AFA 2011 Denver Meetings
Paper. SSRN: 1571700.
Lamont, O., and A. Frazzini. 2007. “The Earnings Announcement
Premium and Trading Volume.” NBER Working Papers 13090,
National Bureau of Economic Research.
Lee, Y. 2017. “Market Reactions to Unexpected Relative Earnings
Performance.” Asia-Pacific Journal of Accounting and
240
Economics 24: 339–357.
Lei, A., and H. Li. 2009. “The Value of Stop Loss Strategies.”
Financial Services Review 18: 23–51.
Lempérière, Y., C. Deremble, P. Seager, M. Potters, and J. P.
Bouchaud. 2014. “Two Centuries of Trend Following.” Journal
of Investment Strategies 3: 41–61.
Li, M., and N. Pearson. 2007. “A ‘Horse Race’ Among Competing
Option Pricing Models Using S&P 500 Index Options.” SSRN:
952770.
Lintner, J. 1965. “The Valuation of Risk Assets and the Selection
of Risky Investments in Stock Portfolios and Capital Budgets.”
The Review of Economics and Statistics 47: 13–37.
Lo, B., and S. Zhang. 2005. “The Volatility Risk Premium
Embedded in Currency Options.” Journal of Financial and
Quantitative Analysis 40: 803–832.
Londono, J. 2011. “The Variance Risk Premium around the
World.” Federal Reserve International Discussion Papers,
Number 1035.
Londono, J., and H. Zhou. 2017. “Variance Risk Premiums and the
Forward Premium Puzzle.” Journal of Financial Economics
124: 415–440.
Louis, T. 1981. “Confidence Intervals for a Binomial Parameter
after Observing No Successes.” The American Statistician 35:
154.
Lucca, D., and E. Moench. 2011. “The pre-FOMC Announcement
Drift.” Staff Report, No. 512, Federal Reserve Bank of New
York.
Maillard, D. 2018. “Adjusted Sharpe Ratio: Some Caveats.” SSRN:
3284396.
Mandelbrot, M. 1963. “The Variation of Certain Speculative
Prices.” The Journal of Business 36: 394–419.
Markopolos, H. 2010. No One Would Listen: A True Financial
Thriller. New York: Wiley.
241
Mason, P., and S. Utke. 2019. “Investor Taxes and Option Prices.”
SSRN: 332680.
Massey, A., and A. Hill. 2012. “Dieting and Food Craving: A
Descriptive, Quasi-Prospective Study.” Appetite 58: 781–785.
McLean, R., and J. Pontiff. 2016. “Does Academic Research
Destroy Stock Return Predictability?” Journal of Finance 71: 5–
32.
Merton, R. 1973. “Theory of Rational Option Pricing.” The Bell
Journal of Economics and Management Science 4: 141–183.
Mills, F. 1927. “The Behavior of Prices.” National Bureau of
Economic Research, New York.
Mitchell, W. 1915. “The Making and Using of Index Numbers.”
Bulletin 1973 of the U.S. Bureau of Labor Statistics.
Mossin, J. 1966, “Equilibrium in a Capital Asset Market.”
Econometrica 34: 768–783.
Muravyev, D., and X. Ni. 2018. “Why Do Option Returns Change
Sign from Day to Night?” SSRN: 2820264.
Nietzsche, F. 1878, “Human, All Too Human,” Section Nine. Man
Alone with Himself, aphorism 494.
Nikkinen, J., and P. Sahlström. 2004. “Impact of the Federal
Open Market Committee's Meetings and Scheduled
Macroeconomic News on Stock Market Uncertainty.”
International Review of Financial Analysis 13: 1–12.
Oehlert, G. 1992. “A Note on the Delta Method.” American
Statistician 46: 27–29.
Olivier, M. 1926. “Les Nombres Indices de la Variation des Prix.”
Doctoral Dissertation: Paris
Osborne, M. 1959. “Brownian Motion in the Stock Market.”
Operations Research 7: 145–173, 807–811.
Patell, J., and M. Wolfson. 1979. “Anticipated Information
Releases Reflected in Call Option Prices.” Journal of
Accounting and Economics 1: 117–140.
242
Park, Y. 2015. “Volatility-of-Volatility and Tail Risk Hedging
Returns.” Journal of Financial Markets 26: 38–63.
Pézier, J. 2004. “Risk and Risk Aversion. In The Professional Risk
Managers' Handbook, ed. C. Alexander and E. Sheedy. New
York: PRMIA Publications.
Philippon, T. 2012. “Finance versus Wal-Mart: Why Are Financial
Services So Expensive.” In Rethinking the Financial Crisis, ed.
A. Blinder, A. Lo, and R. Solow. New York: Russell Sage
Foundation.
Poon, S. 2005. A Practical Guide to Forecasting Financial Market
Volatility. London: Wiley.
Poon, S., and C.W.J. Granger. 2003. “Forecasting Volatility in
Financial
Markets: A Review.” Journal of Economic Literature
41 (2): 478–539.
Prokopczuk, M., and C. Simen. 2014. “Variance Risk Premia in
Commodity Markets.” SSRN: 2195691.
Ramnath, S. 2002. “Investor and Analyst Reactions to Earnings
Announcements of Related Firms: An Empirical Analysis.”
Journal of Accounting Research 40: 1351–1376.
Ross, S. 1976. “The Arbitrage Theory of Capital Asset Pricing.”
Journal of Economic Theory 13: 341–360.
Ruan, X. 2017. “Cross Section of Option Returns and Volatility-of-
Volatility.” SSRN: 3055982.
Samuelson, P. 1965. “Proof That Properly Anticipated Prices
Fluctuate Randomly.” Industrial Management Review 6: 41–
49.
Scholes, M. 1976. “Taxes and the Pricing of Options.” The Journal
of Finance 31: 319–332.
Shaikh, I. and P. Padhi. 2013. “Macroeconomic Announcements
and Implied Volatility Index: Evidence from India VIX.”
Margin: The Journal of Applied Economic Research 7: 417–
442.
Sharpe, W. 1964. “Capital Asset Prices: A Theory of Market
Equilibrium under Conditions of Risk.” The Journal of Finance
243
19: 425–442.
Simon, D., and J. Campasano. 2014. “The VIX Futures Basis:
Evidence and Trading Strategies.” The Journal of Derivatives
21: 54–69.
Sinclair, E. 2010. Option Trading: Pricing and Volatility
Strategies and Techniques. New York: Wiley.
Sinclair, E. 2013. Volatility Trading. 2nd ed. New York: Wiley.
Sinclair, E. 2014. “Confidence Intervals for the Kelly Criterion.”
Journal of Investment Strategies 3: 65–74.
Sinclair, E. 2018. “Reflections on Recent Volatility.” Journal of
Investment Strategies 7: 77–82.
Sinclair, E., and R. Brooks. 2017 “The Skewness and Kurtosis of
European Options and the Implications for Trade Sizing.”
SSRN: 2956161.
So, E., and S. Wang. 2014. “News-Driven Return Reversals:
Liquidity Provision ahead of Earnings Announcements.”
Journal of Financial Economics 114: 20–35.
Taylor, D. 2011. “Retail Investors and the Adjustment of Stock
Prices to Earnings Information.” Wharton School Working
Papers, University of Pennsylvania.
Tosi, A., and A. Ziegler. 2017. “The Timing of Option Returns.”
SSRN: 2909163.
Treynor, J. 1962. “Toward a Theory of Market Value of Risky
Assets.” Unpublished manuscript.
Vähämaa, S., and J. Äijö. 2011. “The Fed's Policy Decisions and
Implied Volatility.” The Journal of Futures Markets 31: 995–
1010.
van Binsbergen, J., and R. Koijen. 2015. “The Term Structure of
Returns: Facts and Theory.” NBER Working Paper 21234.
Vasquez, A. 2017. “Equity Volatility Term Structures and the Cross
Section of Option Returns.” Journal of Financial and
Quantitative Analysis 52: 1–28.
244
Vilkov, G. 2008. “Variance Risk Premium Demystified.” SSRN:
891360.
Watts, R. L. 1978. “Systematic ‘Abnormal’ Returns After Quarterly
Earnings Announcements.” Journal of Financial Economics 6:
127–150.
Yung, H., and H. Zhang. 2003. “An Empirical Investigation of the
GARCH Option Pricing Model: Hedging Performance.” Journal
of Futures Markets 23: 1191–1207.
Zhang, L. 2007. “Sample Mean and Sample Variance: Their
Covariance and Their (In)Dependence.” American Statistician
61: 159–160.
245
Index
A
Acceleration, 60
Adjustment repair, 86
Alpha decay, 15–16
Anchoring, 19
Arbitrage counterparty risk, 178–179
Arbitrage pricing theory (APT), 63
ASPX option profits, taxation, 187
Asymmetric implied volatility skew, 191
ATM, 104, 106t, 123, 131t, 137
At-the-money covered call, delta level, 135
Autocorrelation, 73f, 91
Availability heuristic, 19
Average return, calculation, 24
B
Back-tested rules, performer sample, 23
Backwardation, 61, 62
Badly priced butterfly, returns (summary statistics), 98t
Badly priced condor, returns (summary statistics), 98t
Bankruptcy, risk (increase), 66
Bayesian model, usage, 30
Behavioral biases, inefficiency, 67–68
Behavioral finance, 16–21
Best, defining (possibility), 121
Beta, 67–68, 68t, 82, 196
246
BFLY index, 45, 46f
Biases, 18–20, 23, 30, 113
Bid-ask spreads (total cost component), 200
Bitcoin, 172–173, 172f
Black-Scholes-Merton (BSM) assumptions/equation/model, 2–4,
6, 108, 113, 115, 183, 192
Black-Scholes-Merton (BSM) PDE, 5, 116
Bonds, 49–50
Bonferroni's correction, usage, 23
Broken wing butterflies/condors, 99–100
Butterflies, 95–100, 96f, 98t
BXMD/BXM/BXY, 133, 134t
C
Calendar spread, 100–102
Calls, 55f, 129–136, 129f, 132f, 142
call spread, 130f, 131t, 142f, 143t
implied volatility, level (example), 140t
put-call parity/relationship, 95, 115, 116
strike call, 118f, 120f
Capital asset pricing model (CAPM), development, 63
Cash flows, taxation rate, 6
Catastrophe theory, 20
Chicago Board Options Exchange (CBOE), 16, 36, 45–46, 133, 134f
CNDR index, 45, 45f
Commissions (total cost component), 200
Commodities, 47–49, 48t, 49t
Condors, 95–100, 96f, 97f, 98t, 104t
Confidence, 61–62, 71–75, 80
Conservatism, 19, 30
247
Convergence strategy, 58
Copper, price (decrease), 175
Correlation effects, 99
Counterarguments, examination, 30
Covered calls, 131–137, 132f, 136f
Crowdedness, quantification, 58
Crowded, term (understanding), 58
Crowds/crowding, 36, 57–61
Cryptocurrencies, problems, 172
Currencies, 25, 50, 171–173
D
Daily hedging, usage, 94f, 94t
Data mining, 22, 23
Debt to equity (D/E) ratio, 63, 65
Decision price, 200
Delta, 5, 70–71, 93–95
delta/gamma P/L, 141
delta-hedged option returns, 75
performance, improvement, 136
Directional anomaly, 76–77
Directional forecast, problems, 91t
Directional options, 113, 127
Distribution function, usage, 152
Divergence strategy, 58
Diversifier, function, 101
Dollar premium, 106
Dow Jones 30, variance premia, 44
Dow Jones Industrial Average (DJIA), 26, 44f
Downside risk, 87, 140
248
Drawdown, 158–161, 159f
Drift, 69, 116
E
Earnings announcements, 68–74, 81–82
Earnings-induced reversals, 80–81
Earnings surprises, 31
Efficiency, conditions, 13
Employment announcement, impact, 50
Ensemblle predictions, 36–37
Equities, 39, 42–46, 50–51, 136f
EuroSTOXX 50, composition, 178
Event-driven trades, strengths, 32
Excess kurtosis, 71, 72
Expiration, selection, 109–111
Exponentially weighted moving average (EWMA) model, 22, 34–
37, 38t
F
Factor exposures/investing, 57, 51
Fairly priced butterfly, 96f, 97t
Fairly priced condor, 96f, 97t
Fairly priced short straddle, returns (summary statistics), 87t
Fairly priced short strangle, returns (summary statistics), 88t
Fama-French-Carhart, usage, 31
Fat-tailed results, 71, 72
Federal Reserve Open Market Committee (FOMC), 76–77
FED funds rate, stability, 29
Feedback, 58, 59
Fees (total cost component), 200
249
Fiat currency, risk, 171
Financial advisors, problems, 26
Financial anomalies, data mining (impact/traps), 23
Financial forecasting, principles, 29–30
Financial options, real options (distinctions), 188–189
First-order lagged terms, 34
Fixed commissions, absence, 15
Flat skew condor, results, 104t
Forecast, 35f, 37
Fractional Kelly ratio, impact, 159f
Fraud, impact, 173–174
Front-month implied volatility, 102t
Front-month options, straddle spread at expiry (P/L), 101f
Front-month VIX future/volatility, 40f, 101
Full Kelly, quarter Kelly (trading comparison), 169t
Fundamental analysis, 13, 21, 25–26
Fundamental factors, 63–68
Fundamentals, 136–137
Futures, 4, 40
G
Gamma, 6, 54
Gann angles, 22
GBM, 8, 85, 93, 163, 168f, 169f
Generalized autoregressive conditional heteroskedasticity
(GARCH), 2, 24, 33–36
Generalized Sharpe ratio (GSR), 122–127
Growth rate, 147–148, 150f, 151f, 159, 159f
H
Half-Kelly, betting, 158
250
Hedged option position, average PL, 7, 7f
Hedgers, insurance payment, 52
Hedging costs, presence/absence, 9t
Hedging strike, selection, 107–109
Historical data, usage, 85
Historical long-term average, 34–35
Historical returns, impact, 93t
Historical situations, examination, 29–30
Human nature, impact, 16–17
I
Implied correlation premium, 47
Implied skew, 92, 141
Positional Option Trading (Wiley Trading) Page 26
