Dynamic hedging
managing vanilla and exotic options
by Nassim Nicholas Taleb · first published 1997
60% recommend40% neutral
Why HN recommends it
Dense, technical guide to managing options and volatility portfolios, drawn from Taleb's pit-trading experience. Valued for its practical, intuitive treatment of risk; suits options traders and quants.
Summarised by Claude from recommending comments
Dynamic Hedging is the definitive source on derivatives risk. It provides a real-world methodology for managing portfolios containing any nonlinear security. It presents risks from the vantage point of the option market maker and arbitrage operator. The only book about derivatives risk written by an experienced trader with theoretical training, it remolds option theory to fit the practitioner's environment. As a larger share of market exposure cannot be properly captured by mathematical models, noted option arbitrageur Nassim Taleb uniquely covers both on-model and off-model derivatives risks
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…for you. Here we go anyway: Hull: Futures, Options, and Other Derivatives Natenberg. Don't recall the name, but this is maybe the closest to practical. Paul Wilmott, Quantitative finance. Taleb, Dynamic Hedging. Got a signed copy :) Also I think it's smart to read about instruments that aren't options, ie don't just cut to the chase. Time value of money, futures, forwards, bonds, swaps, equities. Then vanilla…
on “Offline Algorithms in Low-Frequency Trading” ↗Whenever the topic comes up, I throw out a reference to Hull's Futures, Options and other derivatives, Wilmott's Quantitative Finance, and possibly also Taleb's Dynamic Hedging. That's more than enough on the instrument math side, most of what you'll see is pretty mundane stuff, unless you end up on an exotics structuring desk. I'd also note that JS and other MMs mostly don't…
on “Understanding Jane Street” ↗There is a good section about currency bands in Nassim Taleb's first book, Dynamic Hedging. It's a fairly technical book about risk management for options traders, but the section on Market Barriers is particularly germane. I think it's valuable in the sense that it gives you a window into…
on “Trading a Real Market: What the Swiss National Bank Taught Retail Traders” ↗John Hull is canon. Read it, live it, love it, keep it under your pillow. It is truly superb. Nassim Taleb's "Dynamic Hedging" is the finest book I'm aware of on the subject of actually trading/managing vol portfolios. It's REALLY good. And dense. "Paul Wilmott on Quantitative Finance" vol 1-3 are worth having as a reference,…
on “Good books for hackers interested in quant finance?” ↗Two recommendations: "Options, Futures, and Other Derivatives" by John Hull and "Dynamic Hedging" by Taleb.
on “Good books for hackers interested in quant finance?” ↗I'll rephrase for hassy. "investing" is for suckers. the only people making any money in the market are professional traders who aren't at all making decisions based on "trends" or "fundamentals". see: dynamic hedging by nasim taleb--a book that sits on many professional traders desks in which taleb makes more than a few points about trading.
on “Ask HN: Do you invest in the stock market?” ↗This one is the best: http://www.amazon.com/Dynamic-Hedging-Managing-Vanilla-Optio... The first thirty or so pages offer the most intuitive introduction to vanillas I've read. The middle is must read, and the end gets into exotics if that's your fancy.
on “Basic Option Strategies, Part 2 - Options Pricing” ↗Taleb comes of as an asshole here, and a lot of the time really, but after reading all of his books (except dynamic hedging) i find myself agreeing with almost all of his core hypotheses. The Black Swan and Anti-fragile are some amazing reads.
on “Nassim Nicholas Taleb: “The math comes first, words later.”” ↗…pure vol spread, just dump everything in a book, hedge the deltas, win if it realises different than implied. Maybe back book some out-of-the-money options so you don't get killed on bleed (Taleb's book Dynamic Hedging explains this).
on “A web-reading bot made millions on the options market” ↗There are volumes written on this subject, though Taleb's "Dynamic Hedging" is as good an introduction as any. The short explanation is that, in theory, the payoff of any vanilla option can be replicated by trading the underlying asset. For a while, quite a long while even,…
on “Neural Net Side Project Makes $3500/mo Trading Stocks” ↗I have a lot of respect for taleb even though I think he lost his marbles after a certain point. His book dynamic hedging was like the Bible/textbook for my first job (structured products trading). The guy really knows his stuff. I think his mass-market type books like black swan and antifragile really diluted his reputation…
on “The Forbes ‘30 Under 30’ Hustle” ↗…sure how exotic he gets but likely the page that sells this book will have other options books. I think there's one by Espen Hauge about exotics. Relevant book by Nassim Taleb (before his big break) is Dynamic Hedging, which tells you what to do with your option risk once you have it.
on “How I Became a Quant [pdf]” ↗…is, they compensate for the kurtosis of the return distribution (which is why buying deep out of the money options all the time hoping for 2008 to happen is a bad strategy). I recommend Nassim Taleb's Dynamic Hedging which despite the dry title explains these ideas quite intuitively.
on “Technical debt as an opportunity to accumulate technical wealth” ↗…based on organisational behaviour. The Phantom Major by Virginia Cowles is in the same vein with some phenomenal hustling lessons. I still think of both men whenever I think whatever I'm doing is hard. Dynamic Hedging by Taleb was written whilst he was a pit trader and is the most intuitive introduction to thinking about options I've read. It informs my thinking about decision making in terms of probability, path dependency…
on “Ask HN: Non-tech books that have helped you grow professionally?” ↗…maybe the sophomore or junior level. I hear the PDF is freely circulated online. I think understanding how options and futures work is essential for understanding finance. A slightly more technical text, "Dynamic Hedging" (Nassim Nicholas Taleb) is also good (and maybe also available online somewhere...). It is less philosophical and polemic than his other books, but doesn't resist calling you an idiot either, as is Taleb's…
on “SIPC Says It Has Serious Concerns About Robinhood's New Product” ↗