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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
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In the future, it will still be there, but you will have to be sophisticated

Positional Option Trading

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

Directional Trading with Options

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