Volatility Trading – Euan Sinclair : [PDF Download]

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“The great New York Yankee catcher Yogi Berra was alleged to have said, ‘‘In theory there is no difference between theory and practice. In practice there is.’’ The practical difficulties of implementing our trading ideas will only become obvious, and hence become problems that we can address, if we keep detailed records.

It is always important for a trader to track the results of his trades, but it is especially important when using options to trade volatility. We use an instrument, an option, to trade a parameter, volatility.

As we saw in the chapter on hedging, it is quite possible to predict realized volatility correctly yet still lose money on the hedged option position because of path dependence. This is not the case when trading stocks or futures.

In those cases, if we correctly predict direction we will almost certainly realize a profit. If we do not carefully keep records of our trades, it will be impossible to decide if we have been lucky or if we have really discovered a source of edge. You need to know exactly how well you have done in order to do things better.”

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