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Euan Sinclair How to Find an Edge

Euan Sinclair

How do you look for opportunities?

SSRN Papers, dont want crowded

Step 1: Know your type of edge

  1. Risk premium (like selling options) - usually there, smaller but stable. Akin to betting on an NBA game
  2. Market inefficiency - comes occasionally, harder to build a business on, but better returns, bet bigger

Step 2: Model Driven vs Systemic

  1. You have a model, compare it, and trade vs theoretical value. Smaller wins but less noisy.
  2. Systemic - you are dealing with uncertainties, you don't have a prediction for any specific trade, just the set as a whole. Much nosier, more profitable generally.

Variance Risk Premium

  • Big funds trying to harvest this in non sophisticated way
  • 20 or 30 years ago the VRP was so strong you could make money doing anything
In the future, it will still be there, but you will have to be sophisticated

Positional Option Trading

Why Write?
What does buyside & retail get wrong?
Equity Factors as a source of return in options

Directional Trading with Options

Risk Neutral Probability: Don't take into consideration drift
People backrest with a static vega amount, when the PnL would be dependent on vol level
So many degrees of freedom in Options
Options have expiration dates
Options as a risk management vehicle

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  • Maybe we won't have a vaccine soon...but the world will tend to get better again...