"Trading Risk provides a useful and intuitive roadmap of the risk management process, as written by an individual with unique experience and insight into this topic. It is an engaging read and covers complex subject matter in a straightforward and often–entertaining manner."
Stanley Shopkorn, Shopkorn Associates
"Ken Grant′s eminently readable new book on risk management is a rare blend of theory and practical applications. It is a great starting point for the novice and deep enough for the experienced practitioner."
Mark R. Graham, Managing Partner, Blue Elite Fund, Ltd.
"This book describes a very practical approach to risk management in a lucid and entertaining manner. Anyone concerned with the topic of risk management ought to find it of interest."
Susan Estes, Managing Director, Countrywide Securities
"Thoughtful, unique, detailed, actually enjoyable, and comprehensible reading for what is normally a boring and confusing topic."
Dwight Anderson, President, Osprei Management, LP
"A must–read for risk managers of companies of all sizes who want to preserve capital and take practical advantage of trends in the marketplace. This is a clearly written, funny, and entertaining guide to a very serious topic that affects all corporations. This very complex topic was simplified and made easy to understand by a true expert in the art of risk management."
Phupinder Gill, Managing Director & President
Chicago Mercantile Exchange
CHAPTER 1: The Risk Management Investment.
CHAPTER 2: Setting Performance Objectives.
Optimal Target Return.
Nominal Target Return.
CHAPTER 3: Understanding the Profit/Loss Patterns over Time.
And Now to Statistics, but First a Word (or More) about Time Series Construction.
Graphical Representation of Daily P/L.
Histogram of P/L Observations.
A Tribute to Sir Isaac Newton.
Percentage of Winning Days.
Performance Ratio, Average P/L, Winning Days versus Losing Days.
Putting It All Together.
CHAPTER 4: The Risk Components of an Individual Portfolio.
Options Implied Volatility.
Value at Risk (VaR).
Justification for VaR Calculations.
Types of VaR Calculations.
Testing VaR Accuracy.
Setting VaR Parameters.
Use of VaR Calculation in Portfolio Management.
CHAPTER 5: Setting Appropriate Exposure Levels (Rule 1).
Determining the Appropriate Ranges of Exposure.
Method 1: Inverted Sharpe Ratio.
Method 2: Managing Volatility as a Percentage of Trading Capital.
Drawdowns and Netting Risk.
Asymmetric Payoff Function.
CHAPTER 6: Adjusting Portfolio Exposure (Rule 2).
Size of Individual Positions.
Position Level Volatility.
Nonlinear Pricing Dynamics.
Relationship between Strike Price and Underlying Price (Moneyness).
Asymmetric Payoff Functions.
CHAPTER 7: The Risk Components of an Individual Trade.
Your Transaction Performance.
Key Components of a Transactions–Level Database.
Defining a Transaction.
Position Snapshot Statistics.
Core Transactions–Level Statistics.
Trade Level P/L.
P/L per Dollar Invested (Weighted Average P/L).
Average Holding Period.
P/L by Security (P/L Attribution).
Long Side P/L versus Short Side P/L.
Number of Daily Transactions.
Net Market Value (Raw).
Net Market Value (Absolute Value).
Number of Positions.
Final Word on Correlation.
Performance Success Metrics.
Methods for Improving Performance Ratios.
Performance Ratio Components.
Maximizing Your P/L.
Profitability Concentration (90/10) Ratio.
Putting It All Together.
CHAPTER 8: Bringin’ It on Home.
Make a Plan and Stick to It.
If the Plan’s Not Working, Change the Plan.
Seek to Trade with an “Edge”.
Play Your P/L.
Avoid Surprises—Especially to Yourself.
Seek to Maximize Your Performance at the Margin.
Seek Nonmonetary Benefits.
Apply Liberal Doses of Humility and Humor.
Be Healthy/Cultivate Other Interests.
APPENDIX: Optimal f and Risk of Ruin.
Risk of Ruin.