Interested in learning more about options? Try reading one of these books:
Finally, there is "My Life as a Quant" by Emanuel Derman. This one may be hard to find, as I got it from the local library, but if you like math, physics, or options theory, this is an excellent read. Fighting Paulos' efficient market discussion, Derman takes on the problem of the "volatility smile" (the differing levels of implied volatility for different strikes within a given month).
"I realized that the existence of the smile was completely at odds with Black-Scholes' 20-year-old foundation of options theory. And if the Black-Scholes formula was wrong, so was the predicted sensitivity of an options price to movements in the underlying index, its so-called 'delta.'"
Derman spends much of the book discussing models, their development, their uses, and their limits. His conclusions clearly have been largely ignored, as evidenced by the market turmoil at the end of last year, which many believe to have been caused by over-reliance on models.
"Models are only models, toy-like descriptions of idealized worlds. But no mathematical model can capture the intricacies of human psychology. ... I saw that if you listen to the model's siren song for too long, you may end up on the rocks or in the whirlpool."
- Jon, Sheldon Natenberg's "Options Volatility and Pricing"
- Lawrence McMillan's "Options as a Strategic Investment"
- Nassim Taleb's "Dynamic Hedging"
- John Hull's "Options, Futures, and Other Derivatives."
- Taleb's "Fooled by Randomness"
- Benoit Mandelbrot's "The Misbehavior of Markets"
- Jack Schwager's "Market Wizard" series
- Roger Lowenstein's "When Genius Failed."
- "Liar's Poker," by Michael Lewis
- John Allen Paulos' "A Mathematician Plays the Stock Market"
Finally, there is "My Life as a Quant" by Emanuel Derman. This one may be hard to find, as I got it from the local library, but if you like math, physics, or options theory, this is an excellent read. Fighting Paulos' efficient market discussion, Derman takes on the problem of the "volatility smile" (the differing levels of implied volatility for different strikes within a given month). "I realized that the existence of the smile was completely at odds with Black-Scholes' 20-year-old foundation of options theory. And if the Black-Scholes formula was wrong, so was the predicted sensitivity of an options price to movements in the underlying index, its so-called 'delta.'"
Derman spends much of the book discussing models, their development, their uses, and their limits. His conclusions clearly have been largely ignored, as evidenced by the market turmoil at the end of last year, which many believe to have been caused by over-reliance on models.
"Models are only models, toy-like descriptions of idealized worlds. But no mathematical model can capture the intricacies of human psychology. ... I saw that if you listen to the model's siren song for too long, you may end up on the rocks or in the whirlpool."
2 comments:
You're doing a lot of modeling and predicting... Can you brief me on some of these things? It might be interesting to use in some of my own research...
Well, rather than using a bell curve, and just doing what's expected, I'm trying to find the outliers and find the edges of the curve. Rather than taking a bunch of data and saying this is what happens most of the time, I let the most recent data tell me what's going to happen next. So if I get a huge spike in volatility, I don't just throw my hands up and give up.
I haven't gotten into any of the really cool stuff in this post yet. I need to learn calculus first.
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