Saturday, December 27, 2008

Book Reco

I guess this is not the time when people would be going behind books on Derivatives, but I recently came across a nice book. It is called "Option Volatility and Pricing: Advanced Trading Strategies and Techniques" by Sheldon Natenberg. The Amazon Link can be found here.

The most popular book used on Indian campuses is "Options, Futures and Other Derivatives" by John C Hull. It is cheaper and much easier to obtain. It is my personal opinion, but I found Hull verbose and difficult to read.

The basic difference is, Hull gets into the mathematics, whereas Sheldon Natenberg is more of a "How Things Work" kind of book. Sheldon Natenberg was an Options trader while John Hull comes from an academic background. Both books are excellent in their own ways but the difference lies in the language and the mode of presentation.

Hence, if you are looking for a starter book that is mathematically less intimiditating or if you have read Hull and found it a bit above your head, I would strongly recommend Sheldon Natenberg.

Another book that has been strongly recommended to me (from the point of view of practise) is "Dynamic Hedging: Managing Vanilla and Exotic Options" by Nicholas Nassim Taleb.


'Tis the time for alternate views

Given the current turmoil, one chances upon more articles questioning the integrity of the markets. In my view, the question is not so much as to whether markets work, but more of whether we must accept the boom and bust behaviour that has been characteristic of markets. While all of us enjoyed the highs of the boom, the current "bust" (which would be an understatement) has left most people questioning whether that was all worth it. (In fact, whether it was all there to begin with in the first place)

One such work which questions market fundamentalism is "The Alchemy of Finance" by George Soros. He delves a bit into philosophy, raising fundamental questions of how the human mind learns and understands. He uses that to build his "Theory of Reflexivity" making some important observations in the process. Frankly, I have found the book very difficult to read. I have been truly laboring through the pages. In fact, if it was not written by Soros, I would have discarded after one sitting. This blog is purely meant to highlight the existence of the theory. I shall not attempt to explain the theory as I am not sure I even understand it.

It may also be noted that the Theory of Reflexivity has not been taken very seriously in Academia. But, there are some intuitively appealing points for the practitioner. Again, if you have never been truly convinced or impressed by the Efficient Markets Hypothesis, this could be an alternative viewpoint to consider.


skimpy said...

RG was telling me that the Dynamic Hedging book is inaccessible - in terms of price, availability and readability

any fundaes on that?

themiddler said...


I have not read the book myself. Was going to order it off Amazon. Did not know this about the book, but I guess I will buy it anyway.

CB said...


I'm sorry to say, but I dislike Soros. The thing about his books - You can trivially compress the whole book into two pages. He is repetitive, more often than not [there you go, me being him].

And market fundamentalism - Hmm, I've been thinking a lot lot about it. I seem to tilt slightly towards value investing and the Columbian studies of Graham et al, and away from the Chicago GSB studies of efficient markets [Fama et al].

I totally appreciate and in fact adore the concept of free markets, but at one point, we've to realise that it could have a singularity - which is oh-so-trivially called a bubble.

Hmm, its an amazing area of exploration - Free markets. That's the beauty of it, people think they've understood everything, and bang - they realise they've learnt nothing. It's fascinating.

I'm going to buy the derivatives book you suggested. I think we concur both on Hull and Soros.


themiddler said...


Just realized you have a new blog.
I think Sheldon Natenberg is a good guide to have. The flow is smooth and it is easy to find whatever you need.

Of course, it does not get into the mechanics of options pricing. But then again, the use of book depends on the role.

Totally agree on the markets bit. If only we could get better understanding with less pain :P