Books for Learning Practical Volatility Trading and Options Risk

# Looking for a recommendation for a real life volatily trading book.


# Looking for a recommendation for a real life volatily trading book.












Recently I started working in an algotrading company as a programmer. After I studied that subject a little in the university and read a book or two in that field I gained a little knowledge in that area.

But apparently very little. I mean, when I studied it at the beginning from books I learnt about options and futures, bull spread and condors, delta and gamma. And in every book the matterial was a bit same. When I entered the company, I notices that the whole language is different. The traders trade positions not stocks, they buy volatility not assets. They care about vanna and vomma almost as they do for gamma.

I feel that their language is yet unclear.

I am looking for a book that bridges this gap. What I dont like is another book that explains options, gamma and yet another simple bull spread. I feel that the books i have read are detached from real life jargon. (Neither would I want a heavy mathematical book)

## Answer by Contango (score 4, accepted)

https://quant.stackexchange.com/a/1196

"Buying and Selling Volatility" by Kevin Connolly.

This book has an interesting property: it explains options at an intuitive level, without any math. Once you have gone through the first few chapters, you get to the point of being able to roughly value options in your head with some simple arithmetic, and intuitively understand the relationships such as "as the underlying spot price increases, will delta increase or decrease for a call?" (try doing that after being hit on the head by the Black Scholes formula).

The book finishes with some chapters explaining exactly how to get exposure to volatility.

## Answer by Andrey Taptunov (score 13)

https://quant.stackexchange.com/a/1173

I've read N. Taleb. Dynamic hedging for exactly the same reason and found it quite helpful. You can find a preview at Google Books to examine the content - the greatest thing about this book that N. Taleb tries to show how things work in pracice not just how to derive another formula (what is a subjsect for other great books on quantitative finance).

## Answer by NPE (score 9)

https://quant.stackexchange.com/a/1174

Check out Volatility Trading by Euan Sinclair.

There are previews available on both Amazon and Google Books.

## Answer by Reverend Gonzo (score 6)

https://quant.stackexchange.com/a/1175

Natenberg's Options Volatility and Pricing is an excellent resource, and goes into pretty solid detail about why you should be trading volatility rather than direction.

## Answer by Robert (score 5)

https://quant.stackexchange.com/a/2800

I have struggled to find such a book. I got enthusiastic when I first heard about Taleb's Dynamic Hedging, but I found it really disappointing. Doesn't give any market insight into vol trading at all. I just remember something about him saying that digitals are scary to risk manage so you should always price them as a call spread - but we all know that!

I think there is space for just such a book. As an effort to bridge the gap I wrote a post in my blog which explains a lot of the lingo you might hear on a fixed-income trading floor. Understanding the jargon is certainly one important step towards understanding what really happens on the trading floor. (Click here to read)

## Answer by NPE (score 4)

https://quant.stackexchange.com/a/1176

Another good book is Option Market Making by Allen Jan Baird.

## Answer by JohnAndrews (score -1)

https://quant.stackexchange.com/a/3250

Perhaps the following title:

Market Risk Analysis by Carol Alexander (2007)

Market Risk Analysis is the most comprehensive, rigorous and detailed resource available on market risk analysis. Written as a series of four interlinked volumes each title is self-contained, although numerous cross-references to other volumes enable readers to obtain further background knowledge and information about financial applications.

Volume I: Quantitative Methods in Finance covers the essential mathematical and financial background for subsequent volumes. Although many readers will already be familiar with this material, few competing texts contain such a complete and pedagogical exposition of all the basic quantitative concepts required for market risk analysis. There are six comprehensive chapters covering all the calculus, linear algebra, probability and statistics, numerical methods and portfolio mathematics that are necessary for market risk analysis. This is an ideal background text for a Masters course in finance.

Volume II: Practical Financial Econometrics provides a detailed understanding of financial econometrics, with applications to asset pricing and fund management as well as to market risk analysis. It covers equity factor models, including a detailed analysis of the Barra model and tracking error, principal component analysis, volatility and correlation, GARCH, cointegration, copulas, Markov switching, quantile regression, discrete choice models, non-linear regression, forecasting and model evaluation.

Volume III: Pricing, Hedging and Trading Financial Instruments has five very long chapters on the pricing, hedging and trading of bonds and swaps, futures and forwards, options and volatility as well detailed descriptions of mapping portfolios of these financial instruments to their risk factors. There are numerous examples, all coded in interactive Excel spreadsheets, including many pricing formulae for exotic options but excluding the calibration of stochastic volatility models, for which Matlab code is provided. The chapters on options and volatility together constitute 50% of the book, the slightly longer chapter on volatility concentrating on the dynamic properties the two volatility surfaces the implied and the local volatility surfaces that accompany an option pricing model, with particular reference to hedging.

Volume IV: Value at Risk Models builds on the three previous volumes to provide by far the most comprehensive and detailed treatment of market VaR models that is currently available in any textbook. The exposition starts at an elementary level but, as in all the other volumes, the pedagogical approach accompanied by numerous interactive Excel spreadsheets allows readers to experience the application of parametric linear, historical simulation and Monte Carlo VaR models to increasingly complex portfolios. Starting with simple positions, after a few chapters we apply value-at-risk models to interest rate sensitive portfolios, large international securities portfolios, commodity futures, path dependent options and much else. This rigorous treatment includes many new results and applications to regulatory and economic capital allocation, measurement of VaR model risk and stress testing.

Source: http://qoppasociety.org/compendium/books.html#risk-management