Monday, December 1, 2014
Natenberg, Option Volatility and Pricing,2d ed.
Why this stroll down memory lane? Because once again I feel that brevity is in order. My message here is simple: everyone who trades options as stand-alone instruments or who uses options to hedge stock or futures positions should own a copy of Sheldon Natenberg’s Option Volatility and Pricing: Advanced Trading Strategies and Techniques (McGraw-Hill, 2015). Even those who have a copy of the first edition published twenty years ago should pony up for the second edition because it has been considerably updated, revised, and expanded.
Yes, the subtitle says that it is an advanced book and it definitely is. For instance, it deals with such topics as volatility skews and binomial option pricing. But it is written for the trader, not the academic, and it’s math-lite (though heavy on the Greeks, including higher-order sensitivities such as vanna, color, and zomma). Moreover, it proceeds step by step, starting with the basic building blocks, some presented in a way quite different from the usual fare. For instance, Natenberg constructs parity graphs of complex positions using slopes. The reader who’s brand new to options trading will really have to stretch, but it’s a book he can grow with.
The upshot: If you buy only one book on options (which I don't recommend), this should be the one. It’s a textbook, a reference book, and a guide for the perplexed. If, by the way, you're still perplexed after reading Option Volatility and Pricing, a companion workbook will be coming out sometime next year.