Option Volatility & Pricing

Submitted by Book Library on 10 April, 2010 - 14:28

Anyone looking for a good introduction to options trading faces a crowded field of books. Most are atrocious get-rich-quick books targeted to unsophisticated individual investors. Fortunately for professionals, there are a few gems. If you are new to options trading, Natenberg's Option Volatility & Pricing should be the first book you read. It is practical, insightful, and will get you started in the right direction. It is also surprisingly sophisticated for an introductory text. I've been in this business many years, but Natenberg was still able to teach me a thing or two. This is the kind of book you should read twice: once when you are just starting as a trader, and again once you have had a year or two of experience.

The book is largely non-technical, although a wealth of important formulas are provided in appendices. It assumes familiarity with underlier markets, especially equities and futures. The first two chapters introduce basic concepts, exchange procedures and simple trading strategies. The meat of the book starts in Chapter 3, which is an intuitive introduction to option pricing theory. This leads into Chapter 4, which gives a detailed description of the quintessential options trading strategy—put on a position that the market has mispriced, and dynamically hedge it to expiration. The next three chapters elaborate, looking at volatility and the Greeks in more detail.

The rest of the book focuses on practicalities of trading. Several chapters discuss spreading. Others discuss risk analysis and hedging with options. There is a chapter on American exercise. A closing chapter looks at limitations of standard option pricing formulas.

One of the most widely read books among active option traders around the world, Option Volatility & Pricing has been completely updated to reflect the most current developments and trends in option products and trading strategies.


  • Pricing models
  • Volatility considerations
  • Basic and advanced trading strategies
  • Risk management techniques
  • And more!

Option Volatility & Pricing points out the key concepts essential to successful trading Written in a clear, easy-to-understand fashion. Drawing on his experience as a professional trader, author Sheldon Natenberg examines both the theory and reality of option trading. He presents the foundations of option theory explaining how this theory can be used to identify and exploit trading opportunities. Option Volatility & Pricing teaches you to use a wide variety of trading strategies and shows you how to select the strategy that best fits your view of market conditions and individual risk tolerance.

New sections include:

  • Expanded coverage of stock option
  • Strategies for stock index futures and options
  • A broader, more in-depth discussion volatility
  • Analysis of volatility skews
  • Intermarket spreading with options

Positive Review Of Book

I have been a professional options trader for over 11 years. In my experience most options traders fail, and for two reasons: naive faith in mathematical models and software, and a basic misunderstanding of the concept of impled volatility. This is the one book that everyone who has worked for me has been required to read: it is ESSENTIAL.

There is no other book that covers these topics in the the way that market practitioners think about them, nor does Natenberg forget to include anything that's really useful.I have to agreed with another reviewer: understand and study this book! Options trading is a zero-sum game. Professional traders have the edge and been earning a good living from the ill-prepared, arrogant, and naive for years.

Negative Review Of Book

If you are new to options then I don't suggest reading this book. While the book is filled with a LOT of information about the theoretical aspects of trading options and strategies and every aspect of options in detail, I think it will turn off a lot of your newbies to option trading. There is definetely a huge learning curve when it comes to option trading, but I think there are better, more practical ways to learn how to trade them. This book should only be used merely as a reference guide to terminology and various strategies.

If you want to learn options, do a course like Optionetics. But a book like this if you are trying to learn them will most probably turn you off due to the length and theoretical approach taken by the author.

Author Biography

Sheldon Natenberg began his trading career in 1982 as an independent market maker in equity options at the Chicago Board Options Exchange. Since 1985 he has been trading commodity options as an independent floor trader at the Chicago Board of Trade.While continuing to trade, Mr Natenberg has also become active as an educator. In this capacity he has conducted seminars at major exchanges throughout the world.

Table of Contents

  1. The Language of Options
  2. Elementary Strategies
  3. Introduction to Theoretical Pricing Models
  4. Volatility
  5. Using an Option's Theoretical Value
  6. Option Values and Changing Market Conditions
  7. Introduction to Spreading
  8. Volatility Spreads
  9. Risk Considerations
  10. Bull and Bear Spreads
  11. Option Arbitrage
  12. Early Exercise of American Options
  13. Hedging with Options
  14. Volatility with Options
  15. Stock Index Futures and Options
  16. Intermarket Spreading
  17. Position analysis
  18. Models and the Real World
      • Appendix A: A Glossary of Options and Related Terminology
      • Appendix B: The Mathematics of Option Pricing
      • Appendix C: Characteristics of Volatility Spreads
      • Appendix D: What's the Right Strategy?
      • Appendix E: Synthetic and Arbitrage Relationships
      • Appendix F: Recommended Reading

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