Good books on Options

[Nero64]

Can anybody recommend some good books on options.

I have seen a few in the book store, such as

Guy Bower's book
Louise Bedford's book
The Options Course by Fontanills

Thanks

 

[cutz]

Hi Nero,

If you're a beginner i can suggest this http://www.moneybags.com.au/default.asp?d=0&t=1&id=4369&c=0&a=74

 

[Grinder]

the one Cutz suggested would be my pick if Im after a one stop shop on all things options. There are others that go beyond the basics that I like, think there is already a thread on it, all depends on what level your at. IMHO I would just comb the net for the basics & jump on trading forums like this one, thats where I learn't the most.

 

[wayneL]

Fontanills & Bedford - Avoid.

Total rubbish.

 

[Grinder]

Fontanills & Bedford - Avoid.

Total rubbish.

2nd that and also throw in options for equity investors by Newton. It was the 1st options book I purchased & has cost me $$ many times over, taught me how to lose money.

 

[mazzatelli]

If you have a theoretical inclination:
"Option Theory" - Peter James

 

[emilov]

Hey,
I agree with wayne about the rubbish books.

I recently read Option Spread Strategies from Anthony Saliba. I really enjoyed it and reviewed it on my blog. The book teaches about option strategies. You should also read a good technical analysis book. Steve Nison's book on candlesticks is quite great.

Larry McMillan's book recommended above as well as his other one, "McMillan on Options" is great as well, but a tough read. There is some stuff that is very specific to the US market, not really applicable in the Australian market.

 

[Fox]

I have read McMillan and recently Cottle. Any suggestions for the next book? I hear Peter James, Wilmott, Taleb and Natenberg being mentioned in this forum. Who's book would be the natural progression post Cottle? Any advice appreciated.

 

[cutz]

Hi Fox,

You've started from the top but amongst many a couple of standouts for me have been Option Volatility and Pricing-Natenberg, and Option Market Making-Baird, i had one crack at Talebs book but i must admit it was a difficult read for a learner, i'll get back to that one.

 

[wayneL]

I have read McMillan and recently Cottle. Any suggestions for the next book? I hear Peter James, Wilmott, Taleb and Natenberg being mentioned in this forum. Who's book would be the natural progression post Cottle? Any advice appreciated.

The McMillan/Natenberg/Cottle trilogy about wraps up what you need to know as a retail options trader. The rest is acquired through discussion and experience IMO.

 

[mazzatelli]

I had one crack at Talebs book but i must admit it was a difficult read for a learner, i'll get back to that one.

cutz,
It's structured to prep for exotics discussion. The concepts only have practical use if you actively model the vol-curve.

 

[cutz]

cutz,
It's structured to prep for exotics discussion. The concepts only have practical use if you actively model the vol-curve.

Hi Mazza,

Yeah the title caught my eye as it was something i've been looking for (dynamic hedging), didn't realize it was a book for quants till i opened it up.

 

[mazzatelli]

cutz,
Believe it or not, it is > succinct compared to alternate papers on the subject Alot of it is shrouded in technical jargon.
The main gist is to incorporate the impact of vol/time [bleed] and space [speed] as the underlying moves => accurate dynamic hedges.

e.g. Shadow Theta - Long call, spot stays still and from past observations - vol declines; model the negative theta + expected $vol decline. This gives a clearer idea whether to intiate/hold the position, compared to modelling theta alone [assumes vol and price remains constant].

Takes a few reads to sink in, you'll be fine

 

[Fox]

Thanks for your input guys. I'll go Natenberg next. Quant speak terrifies me! I can't understand Mazza half the time . Shadow theta, exotics

I did read Taleb's Black Swan (I'm assuming this is the same Taleb were are talking about) but that book was for general public consumption. I was able to follow that reasonably. I like his idea of stock prices being a fractal distribution. I've also always subscribed to the "fat tails" described in McMillan's book, which in essence is what a "black swan" is.

I'm toying with the idea of buying WOTM options consistently for years and letting the "fat tails" manifest themselves. Guys/Gals, you have permission to tear me to bits over this and show me the fallacy of this type of thinking. Anyone?

 

[cutz]

Hi Fox,

Taleb's book we were was referring to is this one "Dynamic Hedging: Managing Vanilla and Exotic Options".

 

[motorway]

Thanks for your input guys. I'll go Natenberg next. Quant speak terrifies me! I can't understand Mazza half the time . Shadow theta, exotics

I did read Taleb's Black Swan (I'm assuming this is the same Taleb were are talking about) but that book was for general public consumption. I was able to follow that reasonably. I like his idea of stock prices being a fractal distribution. I've also always subscribed to the "fat tails" described in McMillan's book, which in essence is what a "black swan" is.

I'm toying with the idea of buying WOTM options consistently for years and letting the "fat tails" manifest themselves. Guys/Gals, you have permission to tear me to bits over this and show me the fallacy of this type of thinking. Anyone?

Read Both sides of the Argument

start with this

http://www.efalken.com/papers/Taleb2.html

In the end, he promises to teach us how to take advantage of these Black Swans. His strategy is pretty simple. He argues for a barbell strategy of much safety, and a dollop of wild risks, which is, basically, an exposure to something totally unquantifiable, like Llama farms, or any of the myriad opportunities neighbors, spammers, and late-night paid-TV tout. In the context of Tobin’s two fund separation theorem, this means the ‘efficient’ risky portfolio is the most insanely unquantifiable and risky portfolio you can imagine, tempered by its modest allocation.

Yet this implies the unquantifiable and risky portfolio has very good returns, which by definition (unquantifiable) is merely an assertion. As per the super safe assets, the only consistent risk premiums are from extending from overnight to a couple years in bond maturity, and from going from AAA to BBB credit risk. Super safe, is generally 'too safe', in that economists find this risk premium outsized relative to its volatility or covariance difference.

There is good reason to suspect one loses money, on average, on the wildest risks. Consider longshot odds at the racetrack and the highest payout (and thus riskiest) lottery tickets. Researchers have found a negative return premium for highly volatile stocks. Applied to ‘uncertainty’, this same pattern holds, as stocks with the most earnings forecast estimation error also have the most volatility, so it is no surprise they too have a negative premium.

Truly improbable scenarios generally involve more hope than rational investment, as people will pay you to help them dream of the chance to become incredibly rich in the same way that the biggest lotteries, with 100 million to 1 odds, have the highest jackpots and the lowest mean returns.

There are an infinite number of companies that directly target people wishing to make an end run around the rat race, and most of these companies are engaged in selling nothing more than hope

There are far more successful and long lived funds, as I have already pointed out which trade the inverse of the Taleb “swan strategy” at very high Sharpe ratios. They even win in “black swan” events if they manage their money correctly. Taleb’s strat will only strike paydirt when the poop hits the prop. The poop doesn’t hit the prop very often, almost by definition, no matter what kind of fat tail your black duck has.

http://beatsandpiecesblog.wordpress.com/2009/07/21/nassim-taleb-is-a-clown/

motorway

 

[Fox]

Taleb's book we were was referring to is this one "Dynamic Hedging: Managing Vanilla and Exotic Options".

Yes, I'm aware of that. I just wasn't sure if the same author wrote both books. I've just googled and confirmed the same author wrote both Black Swan and Dynamic Hedging.

Dynamic Hedging is the book that I was fearing would be full of quant speak.

 

[wayneL]

e.g. Shadow Theta - Long call, spot stays still and from past observations - vol declines; model the negative theta + expected $vol decline. This gives a clearer idea whether to intiate/hold the position, compared to modelling theta alone [assumes vol and price remains constant].

Takes a few reads to sink in, you'll be fine

It's an interesting area this. It is something you intrinsically pick up with experience. From a retail traders perspective, unless the trader has a thorough grounding in maths and other things we all failed at at school, it is very difficult to explain in simple terms.

The unconscious competent retail trader will have a mental map of how this works, but will have no idea of how to formally model it... and no absolute need to be honest.

Awareness of the effect and likely magnitude will affect strategy selection and hedging choices without having to model it. Of course you can model it if you want.

 

[mazzatelli]

The concepts behind the modifications to the Greeks to derive > efficient hedges is more useful to learn than the model output in a retail context.

This was what I was trying to summarize in response to cutz' reaction to the technical jargon. I can script the models easily for personal trading due to required job competencies, but for others it is definitely overkill.

Having said that, didn't you know how important it is to model $theta earned over the weekend? And tracking net vomma risk of a vertical [1 lot]? LOL: :

 

[sails]

The concepts behind the modifications to the Greeks to derive > efficient hedges is more useful to learn than the model output in a retail context.

This was what I was trying to summarize in response to cutz' reaction to the technical jargon. I can script the models easily for personal trading due to required job competencies, but for others it is definitely overkill.

Having said that, didn't you know how important it is to model $theta earned over the weekend? And tracking net vomma risk of a vertical [1 lot]? LOL: :

Mazza, your posts are getting more challenging to read - sounding more and more like someone over at ET...

Anyway, haven't heard of "vomma risk" - sounds like stomach churning as the trade goes bad - what is it - or are you teasing?...

And weekend theta? I thought they wind it down from Thursday avo to Friday close - then tweak it up again to catch the newbie buyers Mon morning...


EDIT: Oh never mind my ignorance - just googled "vomma" risk and found the answer here: https://www.derivactiv.com/definitions.aspx?search=vomma.