Book Review - Option Volatility and Pricing

Written on June 7, 2008 by OptionsRopeaDope

Here is another book I refer to and reread parts of regularly.

I would guess that one of the biggest reasons why most option traders wash out is the lack of understanding of implied volatility. Option prices are directly related to implied volatility. One makes money by buying options low, and selling options high. You won’t understand why you lose money (or why you will) if you don’t understand volatility. It is a simple  formula really, but the draw of heavily leveraged options and the chance of the lottery win makes most beginning traders pass that point right on by on the way to losing their first account balance, however big or small it may be.

This book addresses that weakness right on. It goes deep into explaining how and why volatility rises and falls, and which strategies to use to support your opinion on if price and/or volatility will rise or fall.Chapters cover bull and bear spreads, multi-expiration spreads, intermarket spreads, index options, and much more. For the mathematician in you, there is an appendix that delves into the black-scholes model and even covers some of the shortcomings of it.

As you can see from some of the Amazon reviews, alot of professional traders consider this the most important book to read for new option traders. And for really understanding and learning to think in terms of trading volatility, it does earn that title very well.

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