“The least successful traders have a certain naïve confidence in their math skills”.
This review was contributed by a professional option trader, and a close friend.
I graduated from University in 2003 with a masters in finance. I later started work at the trading desk at an investment bank in London. My manager told me that option trading is not just knowing your models and understanding the math. He said, and I quote, “The least successful traders have a certain naïve confidence in their math skills.”.
He then gave me a copy of Option Volatility & Pricing, and asked me to read it. He said he started trading just after Sheldon Naternberg published the first edition of this book, and it had been an invaluable resource for him. The book was now part of the training course that my manager developed for the bank.
I think at the time, I didn’t have enough experience to appreciate the book and its contents. It took a few years’ for me to get the most from it. Given that the subtitle of the book is “Advanced Trading Strategies and Techniques” that may have very well been expected.
The book sets the stage in the preface. Sheldon Natenberg states that the text bridges the gap between theoretical pricing models and real world trading, with the needs of the professional trader in mind.
The 2nd edition of the book has 18 chapters (plus a few appendices). There are lots of explanatory diagrams, like the one below.
Many of the chapters contain practical advice on buying, selling, shorting and hedging, given a specific set of market conditions and parameters. Given Natenberg’s experience at Chicago Board Options Exchange and the Chicago Board of trade, you can absorb and assimilate the advice with confidence.
Chapter 6 offers a particularly satisfying explanation of the Greeks, delta, vega and kappa and how they influence trading decisions. There’s an excerpt from this chapter below.
The most useful chapter, and the one I re-read often, is Chapter 18, “Models and the Real World”. Natenberg lists the most common assumptions in options pricing models, and, in some detail, discusses why those assumptions are wrong. However, he concludes by remarking that experienced traders, while being fully aware of their deficiencies, still need to understand theoretical models, and use them as appropriate.
I would recommend this book to any graduate starting a career in option trading, or to those with more experience under their belts.
You can buy “Option Volatility & Pricing: Advanced Trading Strategies and Techniques” at this Amazon by clicking the picture on the top-left of this post, or by clicking here.